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Technology and Health Care in an Era of Limits (1992)

Chapter: PART VI: IMPLICATIONS FOR INNOVATORS

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Suggested Citation:"PART VI: IMPLICATIONS FOR INNOVATORS." Institute of Medicine. 1992. Technology and Health Care in an Era of Limits. Washington, DC: The National Academies Press. doi: 10.17226/2024.
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Part V} Implications for Innovators

1 ~ Managed Care and Pharmaceutical Innovation Frederick W. Telling The many strong managed health care systems that emerged in the United States during the 1980s, along with federal policy changes that af- fect the economics of the pharmaceutical industry, are having a significant impact on industry strategies for innovation. This paper describes typical new practices and three important effects of those practices on industry operations: (1) current gatekeeping methods have altered pharmaceutical use by health care providers; (2) such controls diminish a research-based company's potential sales revenue to support innovation; and (3) the chang- ing health care environment is altering pharmaceutical research strategies and will affect the spectrum and characteristics of dings available in the future. These practices also lead to new policy issues relating to the grow- ing emphasis on outcomes research and to the increasing restrictions on the dissemination of information about drugs- issues that the United States must address if its pharmaceutical industry is to remain competitive. Three recurrent themes are central to these matters. 1. Medical innovation is expensive. Pharmaceutical innovation appears to be the most costly and uncertain of all efforts to develop new medical technologies. Recent studies based on a cohort of products that were first tested in humans between 1970 and 1982 have shown that research and development (R&D) for each innovative new ding (new chemical entity) 201

202 FREDERICK W. TELLING brought to the U.S. market takes 12 years and costs, on average, $231 million (in 1987 dollars; DiMasi et al., 1991~. Evidence indicates that the costs associated with more recent R&D are substantially higher. The eco- nomic burden of paying for this innovation, along with the benefits of the technology, now rests squarely on countries whose health care systems are receptive to technology. 2. Third parties are intervening in health care decisions. Third-party payers in both the public and private sectors of the United States are mov- ing toward the interventionist policies of health care regulators in Europe (Burstall, 1991~. In the case of pharmaceuticals, the controls imposed by payers produce both economic and bureaucratic disincentives to innovation. Such controls are mediated through a diverse variety of mechanisms, which are described more fully below. Unlike Europe, however, where govern- ment is the payer of care and the promoter of industrial strength, most payers in the United States have no direct responsibility for the success of the industries that produce these products. 3. Cost is becoming a dominant factor in the decisions of third-party payers and appears to be replacing patient benefit as the principal factor for determining whether an innovative technology is adopted and used. Although third-party payers rightly emphasize the importance of data on both health and economic outcomes to justify the acceptance of a technolo- gy, generally, they have not shared the responsibility for evaluative re- search to generate such data. MANAGED CARE PRACTICES, GATEKEEPING, AND HEALTH CARE DELIVERY Earlier chapters in this volume describe the evolution of U.S. health care policy and its economic consequences. Projections of 1992 health care expenditures in this country, well fueled on both the demand and supply sides, are $817 billion, or 14 percent of the gross national product (GNP; U.S. Department of Commerce, 1992~. Most of this expense is paid by government and by private employer-funded benefit plans. However, cov- erage and reimbursement across the spectrum of health services vary wide- ly. In 1990, patients paid about 5 percent of hospital care directly out of their own pockets; they paid about 19 percent of physician costs and 74 percent of prescription drug expenses (NCPA/Fiscal Associates, 1990~. Despite the relatively small portion 5 percent of total U.S. health care costs rep- resented by pharmaceuticals (HCFA, Office of the Actuary, 1992) and the limited reimbursement of pharmaceutical charges by institutional payers, the pervasive concerns of such payers about health care costs have nonethe- less affected pharmaceutical usage (Grabowski, 1991~.

MANAGED CARE AND PHARMACEUTICAL INNOVATION Widening Constraints on Health Care Services 203 Earlier in this volume, Soper and Ferriss, Wagner, and Welch and Fish- er describe the evolution of public and private benefit plans from essentially passive payers to active purchasers of health care. In this new role, payers explicitly seek to constrain both the price and the intensity (volume) of health care services. Health maintenance organizations (HMOs), which integrate the delivery and financing of comprehensive health services, have been the main innovators in devising the cost-control methodologies that have come to be called managed care. The diffusion of the concepts of managed care from HMOs, which cover about 15 percent of the population, to traditional indemnity plans has occurred rapidly and without major fan- fare or debate. These techniques now promise to pervade all U.S. health benefit plans within this decade. The objective of managed care is to discourage unnecessary and inap- propriate medical services without jeopardizing necessary, high-quality care. In a broad sense, managed care employs various techniques and degrees of third-party influence to affect the patient's choice of health care provider and the pricing, type, and volume of the provider's goods and services. As a result, it has acquired the label of gatekeeper. Managed care represents a fundamental structural shift to a health care delivery system in which the judgments of third-party payers are interposed in traditional physician-pa- tient decision making. Pressures on Drug Costs The cost-containment tools of managed care generally comprise cover- age design and administration, payment limits, and selective contracting with providers of health care services and goods. To evaluate the potential applicability of such techniques to pharmaceutical selection and usage, it is important to understand the economic structure of the U.S. pharmaceutical market and the American approach to pharmaceutical cost containment as lucidly described by Grabowski (1991~. Enactment of the Drug Price Com- petition and Patent Term Restoration Act in 1984 facilitated the transfer of inventors' intellectual property by establishing a regulatory framework to expedite the marketing of generic copies of a drug. Frequently, generic copies are ready for marketing on the expiration date of the innovator's patent (plus the time extension, if any, provided by the terms of the act). The principal economic consequence of this policy is to oblige the innova- tor to attempt to recoup all of the costs of research, development, and market diffusion of the new product during the considerably shortened peri- od of patent exclusivity; this period must be used as well to provide ade- quate returns to shareholders and to invest in future products. Wholesale

204 FREDERICK W. TELLING prices of generic copies can be much lower than that of the original product because generics are brought to market generally with development invest- ments of less than $1 million (less than 0.5 percent of the innovator's cost) and few, if any, market diffusion expenses (because the innovator's knowl- edge contribution has already been transferred). The price differentials between patented, single-source pharmaceuticals and their generic counterparts have created a two-tiered market for pharma- ceuticals whose patents have expired. Not surprisingly, substantial market shares have shifted to generics, in both institutional settings, where the influence of third-party payers dominates, and in outpatient dispensing, where generics provide attractive profit margins to the retail pharmacy (Masson and Steiner, 1985; Bloom et al., 1986~. The shift is so dramatic that sales of the innovator's product have been found to decrease by 50 percent within 2 years of the introduction of the generic competitor (Grabowski and Ver- non, 1990~. The attractive price differentials provided by generics are an obvious target for managed care policies related to pharmaceutical acceptance and usage. Among the drug substitution techniques that have been adopted extensively by public and private payers are limited formularies that typi- cally favor generics and impose barriers to the inclusion of single-source pharmaceuticals; mandatory substitution of a generic when a branded phar- maceutical is prescribed; therapeutic substitution of a different but thera- peutically similar drug when a single-source pharmaceutical is prescribed; and step-care protocols that typically require the trial of one or more less expensive medications before a more expensive, single-source drug may be used. By their nature these practices favor the use of old therapies rather than new innovative drugs and may harm the quality of patient care (Oster et al., 1987~. A variety of ancillary techniques are frequently applied to reinforce these policies for pharmaceutical cost containment in managed care set- tings. They include minimization of the value of differential benefits in patient subgroups, exclusion of non-approved uses, incorporation of drug reimbursement in prospectively fixed payments for physician and hospital services, direct drug purchasing using competitive bidding, pharmacy capi- tation payments, drug utilization review, and, more recently, inhibition of physicians access to new product information from traditional sources. The Unknown Effects of Managed Care Unfortunately, as yet only limited information is available about the effects of managed care gatekeeping on health outcomes, health care inno- vation, and health care costs. Where the focus of managed care is solely on the short-term control of drug costs and subsequent benefit payments, the

MANAGED CARE AND PHARMACEUTICAL INNOVATION 205 result may be diminished quality of care, increases in the total cost of care (e.g., because of the use of less effective medications or procedures), or both. For example, Soumerai and colleagues (1991) recently reported a twofold increase in nursing home admission rates in a New Hampshire Medicaid population following the imposition of a limit on outpatient dis- pensing of drugs. When the limit was removed, drug use and admission rates returned to their prelimit levels, but most of the patients admitted during the period of the restriction remained in nursing homes. The cost of the presumed excess institutionalization was estimated to far exceed the savings ascribed to the limit on prescribing. In another instance, Sisk and coworkers (1991) have described the detrimental effects of a restrictive Medicare policy on drug treatment of anemia in dialysis patients. The development of sound policies for pharmaceutical use obviously demands a great deal of medical and economic information that often is not available. Managed care firms may have both the data and the incentive to help fill these information voids. An interesting example of such a study appeared early in 1990; based on 1987 data, it was designed as a compre- hensive empirical comparison of prescription drug use in managed care plans and traditional benefit plans. The study found that HMO enrollees had a substantially higher rate of prescription drug use than those in tradi- tional benefit plans. About 14 percent of the claims in the traditional plan were for generic products, whereas the average for generic claims across the HMOs was about 35 percent. Moreover, there were significant, unex- plained variations in prescription drug use among the HMOs, suggesting the persistence of varying physician practice patterns under managed care (Weiner et al., 19911. MANAGED CARE GATEKEEPING: EFFECTS ON THE PHARMACEUTICAL INDUSTRY AND PHARMACEUTICAL INNOVATION Pressure on Resources for R&D The changes in the U.S. pharmaceutical marketplace that are described above and by Grabowski (1991) have profound economic consequences for the research-based pharmaceutical firm The shortened commercial life span of single-source pharmaceutical products reduces the cash flow avail- able to the firm to fund the increasingly expensive ongoing R&D needed to replenish its constantly eroding product portfolio. And even this growing investment in R&D is not being translated into a correspondingly larger number of new drugs. Much of the added investment is directed toward meeting increased regulatory requirements that prolong the drug develop- ment cycle.

206 FREDERICK W. TELLING Payer strategies for containment of pharmaceutical costs powerfully amplify these economic effects and make it even more difficult for a firm to achieve a satisfactory return on its investment. For older, branded drugs, the strategies accelerate the decline in their market share; for new, innova- tive drugs, they both diminish pricing flexibility and impede the diffusion and use of new products. For example, a study of Medicaid formulary practice has revealed delays of as long as 4 years in the acceptance of new products for reimbursement; such delays further shorten the commercial life of the product. Therapeutic substitution and step-care protocols present additional barriers to the diffusion of new pharmaceuticals and reduce the economic return to the innovator. Pressure for Products with Well-Defined Costs and Benefits New practices of third-party payers have contributed to the develop- ment of a broader conceptualization of outcomes research that is, health and economic outcomes research that systematically assesses the impact of an intervention on such measures as cost, quality of life, functional status, and patient satisfaction. Although the measurement of health outcomes has been carried out in the past, combining it with economic outcomes, in which the consequences of health care interventions are compared with their costs, is a more recent practice. Such research can be expected to increase our understanding of the effectiveness of alternative interventions, bring about better decision making by physicians and patients, and, more controversial- ly, lead to the development of practice standards to guide physicians and aid payers in optimizing the use of resources. The growing importance of economic analysis of pharmaceuticals is reflected by the more than 680 articles published on the subject in 1990, a 25-fold increase since 1966, and a new journal, PharmacoEconomics, beginning publication in 1992 (Eisenberg, 1992~. For pharmaceutical companies, the implications of the new focus on outcomes research are quite clear. More elaborate and costly clinical stud- ies must be carried out to provide the persuasive case needed for the new drug to be accepted by gatekeepers who at the same time will be putting pressure on the prices of innovative drugs. Such studies typically require a minimum of many years, thousands of patients, and tens of millions of dollars. Those innovators who can introduce valuable new modalities that are also cost saving will have significant potential for success. However, firms offering products that increase costs will need to demonstrate a more favorable health outcome before the product is considered for use and reim- bursement. In addition, pharmaceutical cost-containment strategies have important second-order economic effects that influence the R&D strategies of the

MANAGED CARE AND PHARMACEUTICAL INNOVATION 207 innovator. As discussed later, these barriers to the entry and use of a new drug in the marketplace drive the innovator toward more exploratory, and therefore higher risk, research projects in the quest for breakthrough inno- vations. Pressure to Limit the Transfer of Information on Drugs Once an innovative new product reaches the market, increasing pres- sures restrict the diffusion of information about its benefits. The Food and Drug Administration's (FDA) recent restrictions on industry's support of scientific symposia and physicians' involvement in disseminating new knowledge are a case in point. Some managed care systems that do not permit the dissemination of industry-sponsored information are troubling not only be- cause of the adversarial relationship of innovators and users that such mea- sures suggest but also because of their potentially negative impact on pa tient care. The practices of Kaiser Permanente, the nation's largest HMO system with more than 6 million enrolled members, illustrate how the diffusion and use of new drugs can be limited. In addition to implementing therapeutic substitution and step-care protocols common to many managed care sys tems, Kaiser management recently began to severely limit contact of the HMO' s physicians with pharmaceutical sales representatives. Practices that restrict the type of product information that can be communicated, that limit the access of sales representatives to facilities, that counter the scientific information provided by companies and prohibit the communication of sci- entific information about nonformulary products, and that do not allow phy- sicians to attend industry symposia present additional barriers to the diffu- sion of new pharmaceuticals into the market. In no instance has there been an assessment of the effects of such practices; nevertheless, other managed care systems are adopting similar restrictive policies. Increased Economic Risk for Pharmaceutical Innovation A substantial body of empirical evidence from economic studies of the pharmaceutical industry is entirely consistent with the expected effects of the market forces just described. Particularly striking is Grabowski and Vernon's (1990) finding that fewer than one-third of the innovative new pharmaceuticals (new chemical entities) introduced into the U.S. market in the 1970s had a positive return on the average R&D investment (including the cost of capital). Furthermore, during the 1980s, as more foreign-based pharmaceutical companies have produced world-class products, U.S.-based companies have experienced declines in their U.S. market share for the economically most important innovative new drugs, compared with the shares

208 FREDERICK W. TELLING they maintained for such drugs in the 1970s (Althuis, 1992~. Global eco- nomic pressure on the industry is also fostering closer relationships based on the scientific and competitive expertise of individual firms. U.S. firms supported the costs of licensing many of the top innovative new drugs in the 1980s and executed the clinical studies required to bring them to the U.S. market. Also tightening the squeeze on economic return is the dramatic increase in the industry's R&D expenditures from $2 billion in 1980 to $9.2 billion in 1991 (PMA, 1991), in the face of a more competitive environment and obvious financial distress in the case of some firms. Notable also is the rapidly increasing share earmarked for clinical R&D (phases 1, 2, and 3~: 17 percent of R&D expenditures in 1979 but 27 percent in 1989 (PMA, 1991~. Partly in response to these trends, an increasing amount of clinical research by U.S. companies is moving overseas where large multicenter trials are often easier and less costly to conduct (Gelijns, 19909. The economics of pharmaceutical innovation are likely to become in- creasingly strained as the techniques of managed care become more strin- gent and are applied more broadly. The implications of this trend for the future of the industry may well be prefigured by the consolidation that has A 1 . ~ 1 . · . . . already occurred both explicitly, In the form of the mergers of world-class firms, which have been seen at unparalleled levels over the past 5 years, and implicitly, through the now widespread practice of two or more firms "co-marketing" newly approved pharmaceutical products. Other aspects of industry's response to the changing economic environment are becoming apparent as well. First, as discussed in the next section, research-based firms are taking a number of steps to adapt their R&D programs to the realities of the new pharmaceutical marketplace. Second. the industry is I, facing new policy issues that must be addressed soon if the United States is to remain the world leader in pharmaceutical innovation. These issues are discussed later in this paper. PHARMACEUTICAL RESEARCH STRATEGIES FOR A CHANGING HEALTH CARE ENVIRONMENT The Promising Technology Base Before turning to the research strategies that appear to be industry's responses to the new market factors, it is important to recognize that con- temporary pharmaceutical R&D is being influenced by profound develop- ments in science and technology. Advances in the understanding of biology at the molecular level and in the power of scientific instrumentation, cou- pled with enhanced computer capabilities, have empowered researchers in their search for new drugs. The most important consequence of this em- powerment has been the research scientist's growing ability to understand

MANAGED CARE AND PHARMACEUTICAL INNOVATION 209 physiological and pathological processes in molecular terms and to synthe- size receptors and create biological models of disease phenomena. An additional bonus for researchers is the assistance of computers in thinking through sophisticated concepts by employing complex theoretical analyses that were simply impossible to carry out even a decade ago. As a result, the empirical approaches of past decades have been largely displaced by more rational approaches to drug design. Contemporary drug research focuses on understanding the biology of disease and intervening in the sequence of specific biological events that characterize a disease in order to treat it. Experimental drugs are now designed, or efficiently screened (tested in large numbers), or both, to capitalize on their ability to interact with bioreceptors that have high probabilities of being therapeutically relevant. This change in research focus is well illustrated by the explicit mecha- nistic characterization of the new drugs that started to emerge in sizable numbers in the 1980s: for example, angiotensin-converting enzyme (ACE) inhibitors, calcium-channel blockers, histamine H-2 receptor antagonists, and so forth. Scientists' improved understanding of disease mechanisms and processes is opening up new drug discovery approaches to attack dis- eases and conditions-such as osteoporosis, Alzheimer's disease, memory loss, migraine, and depression that in earlier decades could not be system- atically addressed through pharmaceutical research. The l990s are likely to see a blossoming of three major trends in phar- maceutical innovation, the products of which began to emerge in sizable numbers in the 1980s. First, one can expect an even more diverse set of new small-molecule drugs that modulate disease by an understood mecha- nism-for example, serotonin re-uptake blockers, aldose reductase inhibi- tors, and immune stimulators. Second, the new biotechnology, which makes possible the synthesis of complex proteins, will offer a broader array of such complex large-molecule drugs. Both of these approaches will be used to produce an increasing proportion of drugs to treat chronic or metabolic diseases, to develop treatments for long-term complications of disease, and to offer significant steps toward medications for the prevention of disease. Third, the utility of both large- and small-molecule drugs will be amplified by promising improvements in drug delivery technology for the sustained release of drugs, for the absorption of protein drugs, and for drugs attached to lyposomes, which are designed to deliver the drug to a specific site and thereby reduce side effects. In sum, the research-based pharmaceutical industry now has in place the technical capability with which to tackle the more intractable diseases and therapeutic needs that up to now have not been amenable to drug inter- vention. If this proves to be the case, it is a timely development indeed, since the new market of the l990s and beyond may only be accessible to new pharmaceuticals that serve unmet needs. Additionally, such innovation

210 FREDERICK W. TELLING offers the potential to directly address the current growth in health care costs by eliminating the necessity for whole areas of care (Brown and Luce, 1990; Brown et al., 1991~. Enhanced Focus on Innovation The development of a modern drug is one of the most complex processes undertaken by any industry. Drug discovery projects that are initiated today must produce a product to meet the standards, conditions, and needs of the year 2000 and beyond. The great financial investment that is now needed for successful pharmaceutical R&D (possibly in excess of $400 million for each new chemical entity), the dramatically intensified competition at home and abroad, and the significantly increased U.S. preoccupation with health care cost containment are placing significant pressure on drug industry managers who are responsible for product innovation. By the year 2000, the technol- ogy gatekeepers will be less tolerant of imitative drugs that fail to offer added value. If an innovative firm is to compete, it must succeed in discov- ering new drugs whose value and effectiveness are demonstrably greater than those offered by other therapies. The degree to which a firm can convince gatekeepers that it has achieved these ends will be an important determinant of how quickly and easily the new product can enter the market. The market environment, which is increasingly influenced by managed care gatekeepers, is already forcing pharmaceutical research managers to evaluate alternative discovery risk options carefully and, in some cases, to shift significantly the balance of their research portfolios in terms of the types of drugs and diseases toward which R&D resources will be directed. Some key considerations in today's discovery research strategies include the following: · New disease targets. It is reasonable to anticipate a relative de- emphasis of research in therapeutic categories that will be well served by generic drugs; the generic armamentarium for such conditions as gastric and duodenal ulcer and essential hypertension will be greatly expanded as a result of patent expirations in the mid- to late 1990s. On the basis of known patent expiration dates, it is easy to project the timing of generic entry as much as a decade in advance. When such an entry occurs, the gatekeepers' criteria for successful entry of new, costly, single-source medications in that category will be formidable indeed. The new knowledge of molecular biology, coupled with commodity- like competition in old therapeutic areas, makes it reasonable to anticipate research emphasis on new drugs that provide added value, that is, drugs for therapeutic targets that are not currently amenable to treatment and for disease targets that have only limited existing therapy in terms of effective- ness, tolerance, toxicity, convenience, or cost. Consistent with the new

MANAGED CARE AND PHARMACEUTICAL INNOVATION 211 emphasis on systemwide optimization, drug research has been actively seeking pharmaceutical alternatives to high-cost surgical procedures (e.g., benign prostatic hypertrophy, angioplasty) and costly chronic care (e.g., osteoporo- sis, Alzheimer's disease). · Well-differentiated, value-added drugs. This phrase characterizes the major strategy of most firms, which seeks to create highly innovative, well- differentiated new drugs with added therapeutic value that will have the least risk of incurring regulatory delay and the best chance of achieving market acceptance. A key aspect of this approach is to seek a meaningful differentiation of a potential new drug candidate early in the research pro- cess-and to drop it early in the process if such differentiation is not clear. Discovering and developing a drug of this type, however, requires expen- sive, highly innovative discovery research that carries the greatest chance of technology failure. When a body of scientific knowledge crystallizes in the scientific com- munity, a number of research groups may independently and simultaneously carry out value-added drug discovery research working from the same base of knowledge, from similar perceptions of medical need, and from a recog- nition of commercial opportunity. In such cases, several new but somewhat different drugs with the same therapeutic mechanism may emerge in a nar- row time frame. The question is, how will the gatekeeper view them? Will all but the first be a sizable risk in terms of market acceptability? . "Fast-follower'' drugs. This research strategy recognizes that the first drug in a new therapeutic class is not likely to be the optimum version. Firms with the capability to quickly discover a second or third drug with a more favorable safety and efficacy profile or a more convenient route of administration may also receive a reasonable return on their R&D invest- ment. A fast-follower has less chance of technology failure but is likely to encounter more difficulty than the initial value-added product in passing the many hurdles of regulatory and market acceptability. The "window of opportunity" for exploiting a new class of drugs in this manner is likely to narrow considerably through the l990s. This is an unfortunate circum- stance for medicine and for the patient. It will discourage the kind of incremental advances that in past decades have provided important building blocks of medical knowledge, and it will narrow the field of choice from which physicians can seek the optimum drug in a therapeutic class for a given patient. · Imitative drugs. During the 1980s, the rapidly escalating costs of R&D, coupled with regulatory delays and decreasing opportunities to cap- ture a share of the market, have significantly decreased industry research on new imitative drugs. In contemporary terminology, imitative drugs are "late followers" that chemically are closely related to their predecessors and act by the same mechanism as the original new drug, but offer no demon

212 FREDERICK W. TELLING strable advantages. The pressures being exerted by gatekeepers are likely to reduce the use of this approach even further, if not curtail it altogether, in the l990s. · Enhanced delivery systems. Another widely embraced R&D strategy calls for more emphasis on the development of superior delivery systems to improve the therapeutic profile of existing medicines. Such reformulated products typically meet important patient needs and enjoy a modest period of market exclusivity, based on patent or regulatory policy, thereby providing an incremental economic return to the innovator. It is reasonable to expect that most chronic-use oral drugs ultimately will be made available in a once-a- day, long-acting dosage and that a number of parenteral or injectable drugs- even proteins- eventually will be provided in practical oral forms. Complex Development Strategies to Demonstrate Added Value The design and execution of clinical development programs for new pharmaceuticals will become even more critical in the l990s than they were in the past decade. Of even greater importance will be the pursuit of improved process efficiency (e.g., mega-clinical trials, computerized new drug applications) begun in the 1980s. In addition, new industry-wide clin- ical development strategies are emerging to deal with the more complex clinical studies needed to demonstrate outcomes. · Outcomes research. Larger, more sophisticated, and more expensive clinical outcomes studies are being planned to demonstrate that, in addition to meeting regulatory requirements for safety and efficacy, a new drug has added value compared with alternative treatments. Such studies are seeking to identify those therapeutic characteristics that usefully differentiate the new drug from existing modalities and to demonstrate those differences with sufficient data to convince gatekeepers. In fact, a few recently intro- duced drugs seem to have been developed or marketed (or both) with con- siderable attention to the likely interests, and purchasing guidelines, of managed care gatekeepers. In addition to seeking more information about the health and economic outcomes of alternative courses of care, companies are gearing up to engage in new kinds of research, including studies on patient preferences and com- pliance. The need to expand clinical research programs to include compar- ative endpoints of interest to gatekeepers will require more expensive re- search undertaken earlier in the R&D process than has been typical in the 1980s. The perceived potential for demonstrable benefits that will exceed costs may ultimately become a key criterion for the selection of research projects capable of producing candidates for full-scale development. · Collaborative studies of outcomes. The best way to demonstrate the

MANAGED CARE AND PHARMACEUTICAL INNOVATION 213 value of pharmaceutical innovations to prospective purchasers is through clinical trials that prove the effectiveness (utility under average conditions of use) of the innovation in the hands of typical health care providers. The new emphasis on such evidence may lead to cooperative studies with the gatekeepers themselves. One example worth watching is the 2-year-old technology assessment program of the Voluntary Hospitals of America (VHA). VHA is planning collaborative studies (e.g., to evaluate competing throm- bolytic agents) to improve its recommendations on technologies and the buying decisions of its 850 member hospitals. Research-based companies are also seeking to include their products in national outcomes studies, for example, those undertaken by the Patient Outcome Research Teams (PORTs), sponsored by the new Agency for Health Care Policy and Research. Such federal studies, however, represent only a fraction of the evaluative clinical research that is needed and that is being undertaken which suggests the need for an effective partnership. In sin- gle-company and industry-wide or industry-buyer studies, it is reasonable to expect that research on outcomes, such as patient quality of life, will be- come more common and more important. NEW POLICY ISSUES CRITICAL TO U.S. COMPETITIVENESS IN PHARMACEUTICALS As recently as a decade ago, American physicians were the primary arbiters of appropriate care for patients, and payers paid the claims for such care largely without questioning those decisions. However, as increasing subsidization of health care led to spiraling costs, payer-based gatekeeping arose (NCPA/Fiscal Associates, 1990~. To date, the gatekeepers targeted for control those new technologies that cannot demonstrate, early on, that they are cost-effective and provide important patient benefits. Clearly, some of the effects of the new managed care policies in regard to pharmaceutical R&D are benefits to society. They include demonstra- tions of cost-effectiveness and improved quality of life, and other outcomes research measures. But what about the research-based pharmaceutical in- dustry? Is the current preoccupation with cost containment (or cost ratio- nalization) detrimental to the strength of pharmaceutical firms? Not neces- sarily; an "adapt or vanish" environment (Burstall, 1991) provides powerful incentives for management to be more creative and more efficient, and industry is clearly responding. Managed care gatekeeping policies have, however, brought two new problems that must be addressed quite soon if the nation's investment in pharmaceutical innovation is to be maintained. 1. Policies to promote collaborative outcomes research are needed. Policies that support a collaborative, comprehensive approach to and re

214 FREDERICK W. TELLING sponsibility for both evaluative research and patient care must be adopted. Such policies should promote cooperative funding of and participation and collaboration in the execution of outcomes work. To adapt Peter Hutt's earlier remarks regarding FDA (1991), managed care gatekeepers must move to a regulatory process driven by policies rather than people and must em- ploy more "consistency, predictability [and] fairness among payers" in cov- erage and payment policies (Huts, 1991, p. 175~. Today, many people and groups are interested in outcomes research, and the general expectation is that the pharmaceutical industry will uncon- ditionally underwrite these new, sophisticated, and costly studies that pay- ers increasingly demand as a precondition for a pharmaceutical's general use. Such an expectation is unreasonable if for no other reason than that it fails to recognize that evaluation of any medical technology takes time: adequate time is necessary to assess a technology in practical use (to gauge its effectiveness) and to determine the value of therapies that prevent or delay the onset of disease. If the time needed to complete such studies is so long that an insufficient period of market exclusivity remains after comple- tion of the study, there is no economic incentive for the innovator to under- take the research. We must recognize that it is not scientifically or economically possible to know everything about a new drug before it has been in wide use. Even more time is required to determine the value of therapies that seek to pre- vent or delay the onset of disease. Outcomes research needs to compare a spectrum of therapies drug and non-drug, new and old. Whereas the phar- maceutical firm can and should carry out the early outcomes research on the merits of its new treatment, it is less reasonable to expect a firm to carry out lengthy studies comparing its product with a variety of alternative therapies in diverse settings particularly if those studies cannot provide results well within the effective market life of the product. Government agencies, on the other hand, may have a valuable role to play in data collection from both retrospective and possibly prospective clinical assessments in instances in which the number of alternatives to be studied is large and the time required for the study is long. Indeed, the National Institutes of Health (NIH) has assumed this kind of role in spon- soring or fostering collaborative studies for the general benefit of medical practice when the study design for comparing alternative therapies and ther- apies with novel modes of action was truly beyond the resources and inter- ests of a single sponsor. For example, NIH has initiated the Treatment of Mild Hypertension Study (TOMHS), which compares the effects of five new and old antihypertensive agents, as well as diet, lifestyle, and placebo, in lowering blood pressure. NIH also undertook the Sorbinil Retinopathy Trial (SRT), which examined the usefulness of a new class of drug an aldose reductase inhibitor to prevent early-stage retinopathy, a major risk

MANAGED CARE AND PHARMACEUTICAL INNOVATION 215 factor for blindness in diabetics. Everyone expects to benefit from this sort of outcomes research, and all should be willing to share the burden of executing the work. Any other policy can only be viewed as the establish- ment of barriers to technology development and innovation. 2. The results of outcomes research should be freely communicated. The second new problem facing the pharmaceutical industry relates to the collection and dissemination of innovation-specific information on medical therapies. Favorable findings from outcomes studies pose some as yet unre- solved questions about how to disseminate scientific information to both practitioners and patients. One of the positive aspects of the health care system's current fascination with outcomes studies is that it explicitly en- compasses patient-centered models of care. It then follows that product regulators (the FDA, the Health Care Financing Administration, and the Blue Cross/Blue Shield Association or Health Insurance Association of America), and especially managed care gatekeepers, should actively seek patient or care-giver input regarding newly available information to help sort out clin- ical alternatives and preferences. Although such a trend is being seen in some areas, the opposite is also occurring, as was discussed earlier in this paper. Why should the patient's interest be neglected on this issue? In a time of transition from affluence to constraints and from doctor-centered deci- sion making to payer-centered decision making essentially, from old rules to new is it possible to provide consumers with too much information about what is known or not known about their health care services? Yet patients are being left out of the decision-making process. Managed care is operating to make choices for them while they have little information on which to base an opinion regarding their therapeutic options. This shift is happening despite the fact that recent polls (Gallup Organization, Inc., per- sonal communication, 1990) show a willingness on the part of patients to pay out of pocket to avoid some managed care restrictions. SUMMARY If the research-based pharmaceutical enterprise is to survive the transi- tion now being seen in the U.S. health care system, society must recognize and address two pivotal issues: 1. Innovation is expensive. The industry probably cannot hope to spend less, but it can expect to spend better. Interested parties here and abroad should be willing to seek ways in which to cooperate and share in the work and costs of broader evaluative research and innovative patient care. 2. Information transfer must not be impeded. If cost (or payment level) is replacing patient benefit as the threshold criterion for the adoption

216 FREDERICK W. TELLING and use of innovative technologies, physicians and patients must be in- formed about the alternatives to these technologies and the consequences of their use. Even if a patient-centered model of care is adopted by managed care systems in the l990s, increasingly educated and affluent consumers of services and products will expect more information about their clinical op- tions. National and organizational policies must Dromote. not retard information sharing about technology. 7 ~ 7 Favorable overall economic policies toward medical innovation and the implementation of managed health care across our country are critical to the future of the U.S. pharmaceutical industry. Either we as a nation make systemwide changes to better balance investment in innovation and cost constraints, or our innovative edge may be dulled by the advances of for- eign competitors. Should this trend continue, we will eventually lose know- how, jobs, and profits to others, and probably end up wondering how we let these things happen. The U.S. pharmaceutical and biotechnology industry is currently strong and able to meet the challenges of improving America's health if the nation's policies provide a favorable environment in which it can succeed. REFERENCES Althuis? T. H. 1992. A therapeutic and economic comparison of the top innovative new drugs of the 1970s and 1980s. Drug Information Journal 26:279-287. Bloom, B. S., Wierz, M. A., and Pauly, M. V. 1986. Cost and price of comparable branded and generic pharmaceuticals. Journal of the American Medical Association 256:2523- 2530. Brown, R. E., and Luce, B. R. 1990. The Value of Pharmaceuticals: A Study of Selected Conditions to Measure the Contribution of Pharmaceuticals to Health Status. Washing- ton, D.C.: Battelle Human Affairs Research Centers. March. Brown, R. E., Elixhauser, A., Sheingold, S., and Luce, B. R. 1991. The Value of Pharmaceu- ticals: An Assessment of Future Costs for Selected Conditions. Washington, D.C.: Battelle Human Affairs Research Centers. February. Burstall, M. L. 1991. European policies influencing pharmaceutical innovation. In: A. C. Gelijns and E. A. Halm, eds. Medical Innovation at the Crossroads. Vol. 2, The Chang- ing Economics of Medical Technology. Washington, D.C.: National Academy Press, pp. 123-140. DiMasi, J. A., Hansen, R. W., Grabowski, H. G., and Lasagna, L. 1991. Cost of innovation in the pharmaceutical industry. Journal of Health Economics 10:107-142. Eisenberg,J.M. 1992. Why a journalofpharmacoeconomics? PharmacoEconomics 1(1):2- 4. Gelijns, A. C. 1990. Appendix A: Comparing the Development of Drugs, Devices, and Clinical Procedures. In: A. C. Gelijns, ed. Medical Innovation at the Crossroads. Vol. 1, Modern Methods of Clinical Investigation. Washington, D.C.: National Academy Press, pp. 147-201. Grabowski, H. 1991. The changing economics of pharmaceutical research and development. In: A. C. Gelijns and E. A. Halm, eds. Medical Innovation at the Crossroads. Vol. 2,

MANAGED CARE AND PHARMA CEUTICAL INNOVATION 217 The Changing Economics of Medical Technology. Washington, D.C.: National Academy Press, pp. 35-52. Grabowski, H., and Vernon, J. 1990. A new look at the returns and risks to pharmaceutical R&D. Management Science 36:804-821. HCFA (Health Care Financing Administration), Office of the Actuary. 1992. Issue Brief Number 122. Cited by the Employee Benefit Research Institute. Washington, D.C. January. Hutt, P. B. 1991. The impact of regulation and reimbursement on pharmaceutical innovation. In: A. C. Gelijns and E. A. Halm, eds. Medical Innovation at the Crossroads. Vol. 2, The Changing Economics of Medical Technology. Washington, D.C.: National Academy Press, pp. 169-180. Masson, A., and Steiner, R. L. 1985. Generic Substitution and Prescription Drug Prices: Economic Effects of State Drug Product Selection Laws. Federal Trade Commission. Washington, D.C.: U.S. Government Printing Office. NCPA (National Center for Policy Analysis)/Fiscal Associates. 1990. U.S. Medical Market Model Project. Personal communication from Gary Robbins. Dallas, Texas/Arlington, Virginia. Oster, G., Huse, D. M., Delea, T. E., Savage, D. D., and Coldtz, G. A. 1987. Cost effective- ness of labetalol and propranolol in the treatment of hypertension among blacks. Journal of the National Medical Association 79:1049-1055. PMA (Pharmaceutical Manufacturers Association). 1991. 1989-1991 Annual Survey Report. Washington, D.C.: The Association, p. 28. Sisk, J. E., Gianfrancesco, F. D., and Coster, J. M. 1991. Recombinant erythropoietin and Medicare payment. Journal of the American Medical Association 266:247-252. Soumerai, S. B., Ross-Degnan, D., Avorn, J., McLaughlin, T. J., and Choodnovskiy, I. 1991. Effects of Medicaid drug-payment limits on admission to hospitals and nursing homes. New England Journal of Medicine 325:1072-1077. U.S. Department of Commerce. 1992. Health and medical services. In: U.S. Industrial Outlook '92: Business Forecasts for 350 Industries. Washington, D.C.: U.S. Govern- ment Printing Office, p. 43-3. Weiner, J. P., Lyles, A., Steinwachs, D. M., and Hall, K. C. 1991. Impact of managed care on prescription drug use. Health Affairs 10(1):140-154.

1 ~ Current Strategies for the Development of Medical Devices Ben L. Holmes This paper discusses the impact of the payment and regulatory environ- ment over the past quarter century on the demand for new medical devices in the United States, and the resultant changes in both the device industry and its product development strategies. It describes three distinct periods, each initiated by signal events: (1) from the start of Medicare and Medicaid in 1965 to the advent of the Device Law in 1976; (2) from 1976 to the advent of a prospective payment system (PPS) and diagnosis-related groups (DRGs) in 1983; and finally, (3) the period of payment reform, from 1983 to the present. This third period is discussed in greater detail than the others, given the changes that have been occurring in the market at this time and its increasing dynamism and complexity. The paper discusses the im- plications of those changes for research and development (R&D) invest- ment over time and concludes with some observations on impediments to continued innovation. PUBLIC POLICY AND MEDICAL DEVICES: 1965-1976 The period from 1965 to 1976 is significant in the development of the medical device industry because of the introduction of the Medicare and Medicaid programs, which stimulated an era of growth. In 1965 the medi- cal device market was relatively small; U.S. Department of Commerce esti 219

220 BEN L. HOLMES mates put total sales at around $200 million. The health care system, which was almost entirely one of retrospective, cost-based, fee-for-service pay- ment, directly encouraged the adoption of medical devices by providers. An enormous influx of health care dollars into the economy through Medi- care and Medicaid programs provided major support to this system and further stimulated the diffusion of innovative medical devices. In response to this growing demand and growth in the scientific and engineering knowledge base (as a result of investment in science and tech- nology during World War II), many new devices and instruments were introduced. Classic products introduced during this period include patient monitoring systems, computerized catheterization laboratories, electrocar- diogram (ECG) management systems, fetal monitors, and computed tomog- raphy (CT) scanners. PUBLIC POLICY AND MEDICAL DEVICES: 1976-1983 The next period was one of increasing government regulation initiated by the enactment in 1976 of the Medical Device Amendments to the Food, Drug, and Cosmetic Act. The enactment of the amendments gave the gov- ernment, through the Food and Drug Administration (FDA), ground-break- ing authority over medical devices. They authorized the FDA to evaluate and approve new medical technologies to ensure their safety and efficacy and to assess manufacturer claims of effectiveness. At the same time, the market was being fueled by growing national wealth, the public's belief in the products of biomedical research, and the demands of providers for new and improved devices (Shabot, 1990~. This latter factor was of particular importance. Physicians, because of their training and their role as patient advocates, strive to do as much as possible for their patients. During these high-growth years, however, patients and providers alike became more insulated from the financial consequences of the physician decisions regarding appropriate health care. Payment contin- ued to be open-ended. With few limits on the availability of funds, capital equipment purchase decisions were often based on the belief that more care was necessarily better care (Altman and Rodwin, 1988~. The period from 1976 to 1983 saw, for the first time, the appearance of several very high priced new modalities for example, magnetic resonance imaging (MRI) systems that sold for $2 million dollars and required an additional $1 million for siting. Medical devices became increasingly so- phisticated, and these kinds of major, capital-intensive health care invest- ments were soon perceived by some to be the culprit responsible for the rising costs of health care. According to the Office of Technology Assess- ment, the utilization of medical technology accounted for nearly one-third of the 107 percent increase in Medicare spending per patient between 1977

STRATEGIES FOR MEDICAL DEVICE DEVELOPMENT 221 and 1982 (Office of Technology Assessment, 1984~.1 With health care costs of all kinds rising, the government attempted to control this escalation by restricting the flow of capital coming into the market. States also began to look for ways to control costs, and introduced certificates of need (CON) to control the diffusion of high-tech medical equipment. Implications for Medical Device R&D What were the implications of these changes for the medical device industry? During this period, industrial R&D strategies remained relatively similar. In spite of government intervention, the market did not change appreciably. Government intervention in the form of FDA regulation ex- tended the time required to bring a product to market, but not significantly. Thus, there was only modest or no decline in 1976 when the Device Amendments were implemented. In the opinion of this author, the lack of change in the market confirms that the medical device amendments essentially codified practices of testing and manufacturing that were already being used by the medical device industry. The introduction of the CON system and of rate regulation in some states did affect the diffusion of some costly medical devices (see the paper by Hillman in this volume). Basically, however, the market continued to be driven by new technology, and the physician in a hospital setting remained the major buying influence. As before, the medical profession had, in effect, few financial constraints on the adoption and use of medical technol- ogy. As a result, during these years the rate of growth of the medical devices industry continued to be healthy. PUBLIC POLICY AND MEDICAL DEVICES: 1983 TO THE PRESENT Then, in the fall of 1983, everything changed with the introduction of the Prospective Payment System for Medicare inhospital services based on DRGs. PPS set a national payment rate for hospital care by classifying patients into DRGs that have specific, predetermined reimbursement values, based on the relative resource consumption of the care provided. Payment is determined by this weight and a subsequent adjustment for factors such as the nature of the hospital and local wage rates (Institute of Medicine, 1990~. Those familiar with a business environment can appreciate the dra 1 This statistic should be viewed in context because the calculation was based on the residual method. That is, health care expenditures are regressed against a number of variables (e.g., labor, supplies, facilities) that influence supply and demand for health services. The unex- plained residual is then attributed to the use of medical technologies.

222 BEN L. HOLMES matic change that occurred. The health care sector changed from a cost- plus system, in which to make a dollar, a dollar had to be spent, to an administered, fixed-price system what some might consider a 180-degree turn. The years following 1983 saw the rise of managed care, preferred provider organizations, and, finally, the recent introduction of a physician payment system founded on resource-based relative value scales (RBRVS). For the first time, the medical device industry felt the hand of government not only in the arena of safety and efficacy regulation but in the field of payment strategies. In the years before 1983, the primary market for medical devices was the in-patient hospital setting, in which the majority of diagnostic and ther- apeutic interventions were carried out. Beginning in 1983, however, in response to the changes in payment methods noted above, there was a strik- ing shift in behavior. To avoid the capitation imposed by DRGs and CONs in the hospital setting, providers moved to outpatient settings and began to explore alternative methods of service delivery (e.g., mobile scanning units). The results were soon apparent. Between 1976 and 1990, outpatient visits to community hospitals increased more than 64 percent, to 326 million visits per year. In the same period, outpatient visits per 1,000 Blue Cross subscribers increased 114 percent. Hospital-based ambulatory surgeries grew about 108 percent between 1983 and 1989. A look at more recent trends reveals that seasonally adjusted outpatient visits to community hospitals increased to 84 million visits in the first quarter of 1991, up 44 percent from the same quarter in 1985 (Hospitals, 1991~. There are predictions that this trend will continue and that hospital outpatient activities will grow from levels of about 16 percent of all hospital income in 1985 to at least 25 percent of income by the year 2000 (Premier Hospitals Alliance). By 1987, hospitals had begun to adjust to the new payment realities. Some continued to try to maximize revenue by buying sophisticated equip- ment that helped recruit physicians, who in turn attracted patients. But it soon became clear to forward-looking hospital administrators that the pur- suit of revenue was not the only answer to their budgetary problems and that indulging in nostalgic longing for the bygone days of cost-plus pay- ment was an idle pastime. Lowering costs, increasing productivity, and improving outcomes were seen as ways to improve the hospital's financial position. In particular, hospitals began to manage their costs more closely. Speculation among its developers that PPS would lead to the discontinua- tion of unprofitable services proved unfounded. Rather, hospitals added services in an attempt to increase profitability by attracting cases that were known to be potentially profitable. Their goals were to increase their mar- ket share and to shift their payer mix to any remaining cost-based payers (Prospective Payment Assessment Commission, 1989~. In addition to these shifts in the health care economy, two potentially

STRATEGIES FOR MEDICAL DEVICE DEVELOPMENT 223 major policy changes are under discussion. The first is the introduction of so-called user fees, a mechanism by which industry itself would underwrite the funds needed by the FDA to process premarketing approval (PMA) requests2 and premarketing notifications or Sl0(k~s.3 One suggestion is to charge $100,000 for each application sent to the FDA. The second policy change is to tie payment to clinical evidence that a new technology im- proves patient health or lowers costs. To qualify for payment, manufactur- ers would have to prove to the satisfaction of a third party that their devices meet these objectives. These changes, in combination with the trends noted above, may have a significant effect on the medical device industry and its R&D strategies. Such an effect will be felt in an industry that has been under substantial pressure for the past decade. During the period following 1983, the market experienced what economists call a stochastic shock a change of monu- mental proportions. When DRGs were implemented the market suffered a major drop in its compound average growth rate, and the single-digit growth rates that were seen following the drop continued to the present. In 1984, the industry experienced negative growth for the first time in its history. Thus, despite some of the adjustments made by providers to continue to acquire promising new medical technologies, PPS had the desired effect of slowing the flow of capital equipment into the health care market. Implications for Medical Device R&D The changes that occurred in the policy environment in this period, in conjunction with advances in the knowledge base underlying device devel- opment, affected the kinds of technologies that were developed. What resulted was a medical device market of greatly increased complexity that exhibited the classic fragmentation of a mature market. The traditional product category of physician aids remained, but expanding engineering capabilities created new options for diagnosing and screening. Dramatic new imaging modalities, such as cardiovascular ultrasound, allowed cardi- ologists for the first time to look at moving structures in the heart. Cinean- giography appeared in the catheterization labs; computed tomography (CT) scanners and MRI gave physicians the ability to look at physiological struc- tures in ways that had scarcely seemed possible a decade previously. 2 Under the requirement for premarketing approval the device manufacturer must provide reasonable assurance of safety and effectiveness under the conditions of intended use. 3 To obtain premarketing notification, also known as a SlO(k), the manufacturer must present evidence that its device is substantially equivalent to an earlier, approved device. If the device is not substantially equivalent, it cannot be marketed until a PMA is approved or the device is reclassified.

224 BEN L. HOLMES The growing importance of liability concerns in U.S. health care also affected device development. Those involved in liability issues in the med- ical community, in their efforts to control rising malpractice rates, discov- ered that information, in the form of well-documented events, constituted a better defense for liability than a string of character references. Products appeared on the market whose main purpose was to provide accurate, valid information in the case of potential liability. Storage and Recall Obstetrical Management Systems were introduced that can retain a fetal monitoring strip for 23 years. Gas monitoring in the operating room, motivated in large part by liability concerns, became common. With such innovations in tech- nology and practice, the liability insurance for anesthesiology has gone down dramatically. Documentation systems in the operating room and in the intensive care unit (ICU) are other examples of recently introduced information technologies. The current trend is to move beyond the mere documenting of informa- ~on and lo use anal Information to actually improve the process of care. This movement to measure results and outcomes has stimulated the devel- opment of such products as clinical information systems, which make it easier for a physician to compare real outcomes with predicted ones to determine whether a procedure makes a difference. Clinical information systems that collect primary data in the ICU are one example, as are scoring systems such as APACHE and TISS. As a greater premium is placed on providing cost-effective care and shorter hospital lengths of stay, incentives have increased for manufacturers to develop technologies that enable care to be moved to alternative, lower- cost outpatient settings. Innovative developments such as catheterization labs, angioplasty, and intraocular lens implants are driven to a great degree by the payment system, as is the Production of imagine devil. that clan he moved about in a mobile van. +; ~ ~ ~ _ ~ 4~ ~ -, ~ ~ ^1~ ~ ^ : _ ~ . ~ 1 11 ~ 1 , 1 ~ ~ . ~ Ad, _ . ~ ~ _ .~^ ~ _ Another trend patient preferences has begun to exert a stronger in- fluence on R&D than in the past as the medical device industry responds to the growing importance of patient involvement in determining the use of particular diagnostic or therapeutic interventions. Previously, the patient was fairly isolated from choice. Now, in designing devices, particularly for healthy persons, the industry gives greater consideration to the user-for example, in the case of Hotter monitors, to whether the device is comfort- able to wear. In the case of MRI and CT technologies, there are other patient comfort, as well as access, issues to consider: whether the banging "noise" is bothersome or whether the closeness of equipment produces claus- trophobia. The new Lucite Salter Packard Children's Hospital at Stanford has wired one-and-a-half floors for Hewlett-Packard telemetry a commu- nications lifeline that permits toddlers, for example, unsupervised freedom of movement (instead of being confined to their cribs) at the same time vital

STRATEGIES FOR MEDICAL DEVICE DEVELOPMENT 225 life signs are being monitored. Noninvasive sensors such as pulse oximetry and automatic blood pressure cuffs improve both comfort and safety (Ger- ard, 1991~. Such products are a tangible demonstration of the industry's increased level of concern about patient preferences and comfort in the design of new devices. In addition, device manufacturers are starting to invest more heavily in studies that show that their products improve outcomes or decrease costs. For example, according to a recent study on the effectiveness of Hewlett- Packard bedside computers in intensive-care nursing, ICU nurses can now spend 22 percent less time recording data; this time savings frees them to perform more nursing care at the bedside and improves a hospital's effi- ciency. In fact, the Lutheran Hospital in La Cross, Wisconsin, where this study took place, has eliminated 6 hours a day of nursing overtime and reduced the nursing staff by one full-time-equivalent position (Allen and Davis, 1991~. In sum, the medical device industry has moved from a rather simple marketplace driven by new technologies and new modalities, to one of multiple patient settings, multiple product categories, and multiple motiva- tions to purchase. The product introduction process has been affected by the addition of the government-introduced regulatory "screens" discussed earlier. Some of these screens have had positive effects on device R&D strategies, but some of the policy changes that are under debate may have less beneficial results. "We are dealing with a market that is defined in- creasingly by regulation and payment policies rather than by technology, patient needs, and competitive forces" notes Jerry E. Robertson, executive vice president and general manager, Life Sciences Sector, 3M Corporation (Robertson, 1990~. To appreciate the potentially negative impact of the introduction of user fees (see the previous discussion), several unique characteristics of the in- dustry must be understood. There are 16,000 medical device companies registered with the FDA. These are mainly small companies, among which sales are not evenly distributed. For example, the top 50, or one-third, of these firms account for 95 percent of sales. In the particular case of pros- thesis manufacturers, 7 percent of the companies account for 50 percent of sales. Frequently, small firms are the early-stage innovators who bring new modalities to the market (Roberts, 1988), which are then produced and distributed on a broader scale by larger manufacturers. This process occurs because it is characteristic of the medical device market that once a new modality is introduced, it can be copied with relative ease. Innovation thus occurs in increments within the various firms, with the first introduction of a product often being the result of development by the small companies. To return to the issue of user fees, the law stipulates that a PMA must be completed within 180 days; in reality, the average review cycle is about

226 BEN L. HOLMES 415 days. The burden of user fees if enacted, in both time and money, would be particularly onerous to small firms. The average development time of a product in a lab is 18 months to 2 years. To be required to invest $100,000 and also experience a significant time delay at the end of that process would jeopardize the ability of these small companies to innovate. and commercialize rapidly. The success of the U.S. device industry depends on small firms bring- ing innovation quickly to the market and legislators must protect this capa- bility. Obviously, a larger company is better able to manage such fees and to survive delays in time to market, but history has shown them to be less likely to produce new technologies. In conclusion, user fees related to PMAs and 510(k~s and the delays that may result in seeking approval for marketing are potentially harmful and could impede the ability of the medi- cal device industry to bring innovation to the marketplace. In addition, the increasingly stringent requirements of insurers and pro- viders for evidence that a new device improves outcomes or lowers costs may have some drawbacks. It is extremely difficult to fully assess a medi- cal device before its introduction into use. Often, as an innovation is used in clinical practice over a period of time, it reveals possibilities that were not envisioned by its originators. Many product successes were completely unforeseen at the time of market introduction. The following examples demonstrate that the clinical world is, in fact, a laboratory as technology diffuses. S. James Adelstein, now executive dean for academic programs of the Faculty of Medicine at Harvard Medical School, was a practicing radiolo- gist at the time of the introduction of the CT scanner. He asked his associ- ates to fill out two slips of paper, which were sealed in an envelope that would be opened 5 years later. He asked them to answer two questions: What is a CT scanner good for today? and Will it be used in 5 years? "What was most striking," Adelstein said after opening the envelopes 5 years later, "was not the errors of commission but those of omission" (S. J. Adelstein, Harvard Medical School, personal communication December 12, 1991~. Good examples of the continuing innovation that occurs following a product's initial diffusion are also available from Hewlett-Packard (HP). The company entered the ultrasound field in the early 1960s with a product that looked for deviations in the midline of the brain induced by trauma- but there was only a limited market for the product. In 1981 the firm introduced a cardiovascular system based on that initial device, which has been quite successful a situation that was not easy to predict given HP's first entry into the market and the way that the technology initially was used. HP was also one of the first firms to introduce an oximeter in 1978. It was an ear oximeter for use in sleep studies (a small market) and sold for

STRATEGIES FOR MEDICAL DEVICE DEVELOPMENT 227 about $12,000. Seven or eight years later, with the development of pulse oximetry, the market grew to what is now a $150 million business. Today, pulse oximeters are a major factor in preventing hypoxia (an oxygen depri- vation of the brain caused by improper anesthesia). The March 31, 1991 edition of the Boston Globe summarizes the current environment: Using techniques developed at the Harvard hospitals and a new piece of equipment called a pulse oximeter, a small device worn on the finger that emits a signal when the flow of oxygen drops, doctors have all but relegat- ed hypoxia to the dustbin of medical history. Thus, life has improved for patients and anesthesiologists, whose annual malpractice premiums have fallen to under $9,000 a year from $25,000 in just four years. When HP first introduced its ear oximetry technology, no one could have predicted this use, nor the dramatic contribution it would make. The incre- mental innovation demonstrated in the above examples is important, how- ever, and payment schemes should not unnecessarily restrict the evolution of medical devices within clinical practice. OBSERVATIONS Recognizing the interplay of these various regulatory and payment in- terventions, how should the medical device industry respond? One way to view the problem is from the perspective of the fourth quadrant of the Cartesian coordinate system (see Figure 13-1~. This is where I believe the medical device industry needs to focus its product development efforts to design products that do one of two things: either improve outcomes or help keep the cost of health care down or, ideally, yield the vector sum of both these endpoints. Everything the industry does must pass muster as lying along one of those two axes. In addition, the industry must work to rid the health care arena of frivolous, redundant technological modalities that drive up costs but pro- vide no counterbalancing benefits. It must discourage overutilization of its products. For the electromedical industry to continue to innovate, it must also educate policymakers regarding the fundamental distinction between the invention of technology and its utilization. All too often, the virtues of invention are being blamed for the sins of overuse and inappropriate use. Without question, the industry can be attentive to lowering overall health care costs. Yet it should be kept in mind that the development of new medical devices is a particularly costly and risky enterprise. As a group, U.S. medical technology companies invest as much as 6.2 percent of their sales revenues in R&D-but many spend as much as 15 percent or more. These figures become even more pointed when compared with the national average for U.S. manufacturers, which is 3 percent of sales. When a medi

228 In In o a) BEN L. HOLMES Better Outcomes ~ . . \ ~ .' \ .\~Q ~ · ' \ "'\' ~ . \ . \ . . . . . . \ \4 FIGURE 13-1 Fourth quadrant in a Cartesian graph of costs and outcomes. cat device firm introduces a product, it needs to know what it must do to satisfy government regulations and how long it will take to get approvals. In an uncertain regulatory environment, companies face increased risks with innovation (Health Industry Manufacturers Association, 1991~. Today, a company could wait months or years to find out whether a new technology will be approved for marketing and whether the costs for its use will be reimbursed. (It took several years, for example, before MRI received approvals.) It is unrealistic to expect firms, especially small ones, to support a product through what could be quite lengthy approval cycles. We must continue to explore a middle ground, in which some technologies would be covered earlier or on an interim basis while they are undergoing

STRATEGIES FOR MEDICAL DEVICE DEVELOPMENT 229 further evaluation. This approach could address both access and utilization concerns while retaining incentives for innovation. In conclusion, the device industry has seen dramatic change over the past 27 years, and further policy change seems likely. Despite some finan- cial buffeting, the electromedical device industry remains a profitable enter- prise, which produces a $3.2 billion positive balance of trade and employs about 248,000 Americans (Bowles, 1990~. Its continued strength and abili- ty to support innovation is likely to lead to improvements in existing prod- ucts and the capability to address emerging health care needs. What is done in the coming years to reshape the health care system in this country will affect the products that the industry is able to develop and produce, and will help to define the kind of medical interventions that will be available in the decades ahead. I am confident that industry, govern- ment, and health care providers can, in the spirit of collaboration, generate solutions that will create a more cost-effective health care system that will not unnecessarily hamper innovation. REFERENCES Allen, D., and Davis, M. 1991. Clinical Information Systems Impact on the Intensive Care Unit. La Crosse, Wisc.: Lutheran Hospital. March. Altman, S. H., and Rodwin, M. A. 1988. Halfway competitive markets and ineffective regulation: The American health care system. Journal of Health Politics, Policy and Law, 13(2):323-339. Bowles, J. 1990. America's miracle industry. Fortune, December 17. Gerard, B. 1991. Medical marvels. Measure, September-October, pp. 16-19. Health Industry Manufacturers Association. 1991. Competitiveness of the U.S. Health Care Technology Industry. Washington, D.C.: The Association, pp. H19-H20. Hospitals. 1991. Tracking the long-term growth in outpatient care. Vol. 65, issue no. 23, p. 16. Institute of Medicine. 1990. Medicare: A Strategy for Quality Assurance. Vol. 1. K. N. Lohr, ed. Washington, D.C.: National Academy Press, pp. 108-109. Office of Technology Assessment, U.S. Congress. 1984. Medical Technology and Costs of the Medicare Program. Publication No. OTA-H-228. Washington, D.C.: Government Printing Office. Premier Hospitals Alliance. Setting the Alliance Standard Premier's Strategic Plan-1991. Chicago, Ill.: Premier Hospitals Alliance, p. 15. Prospective Payment Assessment Commission. 1989. Medicare Prospective Payment and the American Health Care System-Report to the Congress. Washington, D.C.: Prospective Payment Assessment Commission, June, pp. 112-113. Roberts, E. B. 1988. Technological innovation and medical devices. In: N~ew Medical Devices: Invention, Development, and Use. Washington, At..: National Acacemy Press, p. 46 ~ l .= 1 ~ . ~ A ~ AN 1 Robertson, J. 1990. The future of H1MA: lacing the longer view. rresenlallon al me Annual Meeting of Health Industry Manufacturers Association. March 20. Shabot, M. M. 1990. Changing Policies for Reimbursement of Surgeons: Impact on the Introduction and Use of Technologies in the Surgical ICU. Los Angeles, Calif.: Cedars- Sinai Medical Center, p. 4.

14 The Changing Health Care Economy: Impact on Surgical Techniques Frank G. Moody The complexity of surgical therapy and its demand for life-saving and life-supporting technology have made it especially vulnerable to reductions in the nation's investment in biomedical research and development. In fact, improvement in the safety and efficacy of surgical therapy depends critical- ly on continued evolution of more sophisticated technology and techniques for the diagnosis and treatment of those diseases amenable to operative manipulation. Cost factors, however, that in part relate to successes derived from the application of innovative technologies have generated a critical assessment of therapies that require an extraordinary use of health resources (Showstack et al., 1985~. Organ transplantation, coronary artery bypass, hip replacement, and multimodal cancer therapy are only a few examples of treatments commonly used in the United States but applied with restraint elsewhere in the world because of their expense. Of equal importance is the question of the public good. Because money has emerged as a rate-limiting step in the application of new technologies abroad, it is reasonable to assume that the continued inflation of the health dollar in the United States will lead to similar concerns and restraints in the future application of expensive therapies. The rapid movement of surgical treatment from the hospital to the outpatient setting is an indication that surgeons are responding to the forces of the marketplace. But what effect will this traditionally free-enterprise adaptive response have on future inno 231

232 FRANK G. MOODY vation? Will surgeons abandon their quest for cures of some of humanity's most devastating diseases? I do not believe so, but in a way, surgeons have become the victims of their own success in applying the remarkable techno- logical advances that characterize the latter half of this century. The following treatise relates the day-to-day practice of surgery to the current health care scene. It examines surgical mores and provides an explanation as to why surgical therapies have remained relatively unfettered by bureaucratic regulation. It also discusses surgery's use and possibly misuse of technology. Finally, it offers an example of a feedback loop in real time in which technology leads to new techniques that in turn lead to new technology, and so forth. The process repeats itself for the betterment of the patient-but at a price. This paper attempts to establish a construct that will convince the reader that investments in innovative technology in the present will produce not only social benefits but cost savings in the future. THE SURGEON AS INNOVATOR Surgery is a therapeutic discipline that has its origins in the inherent physical violence of ancient times. Not much has changed over the centu- ries; war and its need for aggressive treatment of the wounded have stimu- lated many modern advances in surgical therapy. The need for timely interventions to control bleeding, remove fragments of missiles, and excise nonviable tissue or body parts provided the beginnings for a bold, often daring, yet risky medical discipline that, for the most part, depends on ingenious manipulative approaches to the problems it attempts to resolve. One of the earliest and most effective therapies for a common civilian ailment was the "cutting of the stone" (in medical terms, the removal of a bladder stone by perineal cystotomy) (Barrey, 1933~. One can hardly imag- ine the pain of the stone and the pain of the incision in the era before anesthetics and analgesia. It is no wonder that surgeons were by necessity itinerant and poorly regarded by their medical colleagues. Furthermore, operative procedures such as perineal cystotomy were associated with post- operative morbidity that sometimes was worse than the disease. From the beginning, surgeons were innovative, because patients pre- sented for treatment with their own particular manifestations of disease and anatomical deformities. What might be a satisfactory operative approach for one patient could be disastrous for another with the same disease. This author finds it helpful to distinguish novel therapies from innova- tive therapies. A novel procedure is one that has never been done before; innovative therapies are those that are successful over time and are adopted into general practice. The independent nature of surgical practice in this country has allowed the development and application of a variety of suc

SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 233 cessful techniques. Operations on the heart, the brain, the liver, and other vital organs stand as marvels of modern medicine (Ravitch, 1981~. In academic and urban medical centers, transplantation of organs, excision of cataracts, joint replacements, and endoscopic and interventional radiologic techniques are part of everyday practice. These advances came about be- cause of the need to help someone with a life-threatening or life-limiting ailment. Some of the other critical factors in surgical innovation are ideas, technology, evaluation, regulation, liability, and money. Translating the ideas that are generated, in response to patient needs, into effective, safe therapies depends on a process of technological development, which in- cludes evaluation as an essential component. The remarkable advances made in surgical therapy during the past sev- eral decades are in part a result of the relatively unregulated environment of surgical practice. Indeed, during the early days of the development of modern surgical techniques, the only regulation came from the limits of technology. Surgical treatment was a personal contract for service between the surgeon and the patient; the service required only an operating room, an anesthesiologist, the operating team, and some relatively simple tools. Of- ten, the use of innovative therapies were attempts to correct or improve desperate, often life-threatening problems for patients for whom the trip to the operating room was the path of last resort. Liability was not a major consideration, nor was money, because payers reimbursed charges for the new and ultimately life-saving therapies. A climate of fiscal constraint, however, has made money, liability, evaluation, and regulation the domi- nant considerations at the end of this remarkable period of medical history. The emphasis now being placed on these factors may constrain the develop- ment of new therapies. Nevertheless, there remains a need for new ideas and for continuing evolution of all aspects of medical technology. THE CURRENT STATUS OF SURGICAL INNOVATION There is little evidence up to this point that the pace of innovation in surgery has changed during a decade characterized by obsession with the rising costs of health care. Nevertheless, as commentators elsewhere have noted, other aspects of health care have been significantly affected. This section discusses some of the implications for surgical innovation of current trends in the health care industry. The two major payers in the health delivery system, industry and gov- ernment, are tightly bound in a synergistic relationship. The components of our society that provide the wherewithal to care for patients' needs might best be called a health care industry. Pharmaceutical houses, device mak- ers, software packagers, clinics, hospitals, publishers, third-party payers,

234 FRANK G. MOODY physicians and other health workers, and educational institutions are all important elements of the health care industry. Major changes in the activ- ities of one component will have a profound effect on the functions of the others. The defense industry provides a good analogy in its diverse rela- tionships with various segments of the economy. As noted earlier, innovation in surgical practice is intimately linked to advances in drugs and devices. Examples abound: synthetic prostheses and sutures, the heart-lung machine, antibiotics, parenteral nutrition, and immu- nosuppressive agents, to name only a few. To be useful, innovation must have an application. Surgeons on occasion perform novel procedures, but unless the procedure, through application and refinement, can be shown to be effective and safe, it will not be accepted into practice in the long run. Unfortunately, many procedures are put into practice prior to rigorous eval- uation of clinical and economic outcomes. Recognition of this shortcoming has led to an increasing emphasis on outcome research, as has been dis- cussed elsewhere (Wennberg, 1990~. The process of cost analysis is quite foreign to surgeons who, as a group, are accustomed to the high costs of their procedures and who tend to employ whatever tools or techniques might help their patients, regardless of their cost. One of the reasons for such an attitude is that surgeons are often called upon to render therapy in the advanced stages of a disease. Organ transplants, for example, are not usually performed until the patient's organ fails. Severely injured patients often require extensive interventions and prolonged stays in the intensive care unit if they are to survive, and even treatments of this type may fail after expenditures of hundreds of thousands of dollars. Until recently, the true costs of therapy have been difficult to assess, but diagnosis-related groups (DRGs) introduced a strong incentive to do so. Hospitals have quickly learned how to distinguish charges from costs, because their very survival depends on careful financial analysis. Surgeons and physicians in general have been slow to appreciate the costs they impose on the system, but recent discussions of changes in reimburse- ment through the resource-based relative value scale (RBRVS) have stimu- lated a high level of awareness with regard to the relative worth of profes- sional service. The cost-effectiveness of surgical therapy raises the question of endpoints. Is a therapy effective when it provides a few months or years of useful life, but the patient dies of the disease for which he or she is treated? Is cosmetic surgery cost-effective? Should older patients be de- nied the benefits of coronary bypass surgery because their days are already numbered? These are issues that must be addressed by the public and the profession in the years ahead. Surgeons appear to be adaptable and have quickly learned to comply with Medicare's prospective payment system and its method of reimbursing

SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 235 hospitals by DRGs (Schwartz and Mendelsen, 1991). Following implemen- tation of the DRGs, lengths of stay for surgical patients dropped precipi- tously, and surgical procedures rapidly moved from the hospital to the am- bulatory setting. Patients were no longer admitted for preoperative workups, and even patients facing complex surgical procedures went directly from home to the operating room after only a brief stay in a preoperative staging area. This shift from inpatient to outpatient performance of procedures, however, did not appear to alter the rate of escalation of the aggregate cost of surgical care, although, in fact, it appears that surgical care was im- proved. The financial success of an ambulatory surgicenter requires careful cost accounting and a well-managed business environment. Efforts thus were made to accomplish surgical procedures in a more cost-effective, effi- cient manner. ASSESSMENT OF NEW PROCEDURES Surgeons have been slow to incorporate rigorous assessment of their procedures into their culture (Wennberg et al., 1988~. Other areas of medi- cine, however, have used randomized controlled trials to determine which of two or more alternative therapies might be the best approach to a specific disease. The current trials of carotid endarterectomy versus medical thera- py are a good example of an instance in which subpopulations of patients who might benefit from a surgical approach were identified (North Ameri- can Symptomatic Carotid Endarterectomy Trial Collaborators, 1991~. Con- trolled trials have also shown the efficacy of approaches to treating breast cancer that are less morbid than surgery but equally effective (Berte et al., 1988~. Controlled trials to determine whether surgical therapy is better than medical therapy are uncommon. Nevertheless, advances in pharmacologi- cal approaches to what previously were thought to be exclusively surgical problems (e.g., prostatism, complications of peptic ulcer disease, hyperthy- roidism) have rapidly displaced commonly performed surgical procedures. Clearly, effective, less invasive therapies are preferred over surgical proce- dures by patients and practitioners, even though surgery may be more defin- itive in resolving the problem. When type 2 histamine (H-2) blocking agents became available to control the symptoms of peptic ulcer, there was no need for a randomized trial to establish the superiority of the medical versus the operative approach. Until the introduction of potent antisecreto- ry agents, a surgical approach was the only way to relieve the intolerable and sometimes life-threatening manifestations of a duodenal or gastric ul- cer. The less morbid and equally effective pharmacological therapy has emerged as the treatment of choice for the uncomplicated form of this common disease.

236 FRANK G. MOODY In general, the outcomes of randomized trials usually reveal a lack of superiority of one surgical therapy combined with another or with a nonsur- gical option. There are many reasons for this-for example, the diversity of the disease being treated and its varying manifestations in different sub- jects. It is also difficult to control the conditions of the trial and ensure that only the variable of interest is being measured; the need to conduct the trial at multiple sites and to use different surgeons in order to recruit an adequate number of patients over a reasonable period of time can introduce a great deal of variability. Portasystemic shunting for the prevention of esophageal hemorrhage from portal hypertension is an example of the complexity involved in ap- plying controlled trials to surgical treatment (Resnick et al., 1974~. The idea certainly had merit: preventing variceal hemorrhage would greatly reduce the morbidity of this serious complication of portal hypertension. But what was learned in the trial was that, although a portasystemic shunt significantly reduced the risk of esophageal hemorrhage, it increased the rate of death from liver failure. Furthermore, some patients who probably would never have bled from their varices died of liver failure as a conse- quence of the procedure (Rikkers, 1982~. Subsequent advances in therapy, however, sometimes render former studies of little contemporary relevance, and this proved to be the case here (Rikkers, 1990~. Variceal scleral thera- py has recently emerged as a less invasive, more effective way to control bleeding of esophageal varices in most patients, and liver transplantation has replaced portasystemic shunting for patients with a failing liver, even among alcoholic patients. Social concerns, however, have constrained the application of this expensive, organ-limited procedure among alcoholic pa- tients (Cello et al., 1987; Kumar et al., 19901. _ ARE THE COSTS AND BENEFITS OF NEW SURGICAL PROCEDURES CALCULABLE? The incremental cost of introducing a new surgical procedure is gradu- ally assuming critical importance. For example, if third-party payers will compensate hospitals or physicians only for well-established therapies, it is unlikely that new treatments, even if less costly or more effective, will be utilized. Current Procedural Terminology (CPT) codes establish what pro- cedures payers, private as well as public, will cover. The shift from the "usual and customary" compensation base to a "relative value" fee schedule may also serve to determine which operations are done. In addition, if payers only cover operations that have proven efficacy and safety in the hands of the doer, a tightly controlled system will evolve that may be better for the individual patient but that will significantly constrain a surgeon from exercising his or her judgment. A system of this kind would require a

SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 237 large body of normative experience and detailed validation of outcome cri- teria as a reference. Furthermore, it assumes that the patient populations being treated are homogeneous, which is far from the truth in most complex diseases. One potential outcome of such a system might be that therapeutic decisions based on and limited to fee schedules would have a dampening effect on surgical innovation, because the decision would fail to recognize procedures that have not been proved effective. The new order of health care cost management must find a way to allow well-trained surgeons to provide services to those who need them with a minimum of bureaucratic interference. It appears that the introduc- tion of the prospective payment system, of utilization review and second opinions, and even of managed care has not significantly influenced the types of operations that are performed or the kinds of patients who undergo them. What surgeons do for their patients is governed by the usual process of graduate surgical education, postgraduate courses, journals, and profes- sional meetings. Schemes that are designed to limit the application of surgical options at the point of service are not likely to be effective. They can only slow down the application of treatment at the time it is needed, not prevent its use if it is the best or only option. The denial of surgical service because of lack of access based on finan- cial considerations is another concern. Refusing payment for the perfor- mance of a gastric restrictive procedure for chronic morbid obesity is a case in point. In spite of the availability of two safe, reasonably effective opera- tions for this debilitating disease the vertical-banded gastroplasty and the small-pouch Roux limb gastric bypass-public and private insurers have markedly restricted the benefits of these operations by refusing to cover them. The recent consensus conference sponsored by the National Insti- tutes of Health attested to the unique benefits of these procedures and may correct this injustice to those with a genetic predisposition for morbid obe- sity (National Institutes of Health, 1991~. Decisions about which treatments should be offered to patients must be made by those professionals who understand the patient and his or her illness and life situation. Such important, highly individualized decisions cannot easily or even appropriately be made by a committee, either locally or in Washington. The issues of appropriateness of care and level of con- trol of therapeutic decision making are complicated by the nation's third- party reimbursement system. If the patient was more directly involved in purchasing surgical services, the patient-surgeon procedural contract could be a bilateral negotiation, but such is not the case. Payers have an increas- ing interest in controlling the treatment options offered to their patients. This is a positive trend if the exclusive point of service is selected on the basis of established proficiency rather than on costs alone.

238 FRANK G. MOODY THE COST-EFFECTIVENESS OF INNOVATION Unfortunately, the individualized doctor-patient relationship has not pre- vented, and may be a factor in, the increases that have occurred in the cost of medical care over the past two decades. Physicians have always been the purveyors of health services for their patients, and only recently have they become sensitive to the limitations of the system they broker. The incre- mental rise in health expenditures parallels the opportunities for precision in diagnosis and treatment Innovative technology has brought medicine to the point of being able to treat afflictions that previously were thought to be uncorrectable. It is unfortunate that the lack of money, whether in the form of federal or state budgets, the profit margins of industry, personal financial resources, or a percentage of the gross national product, should be the major rate-limiting step to further improvements in health care. The U.S. health care system is simply too expensive and not uniformly accessible to all who live in this country. Total expenditures for health care in 1992 are estimat- ed to be in excess of $700 billion; if used wisely, these funds should be enough to deliver a high level of health care to all U.S. residents. Although money is not the only important variable in a health care system, it is at the center of current discussions. Thus, the question of costs and their relationship to innovative therapies must be considered. Will new procedures that are effective and applicable to large numbers of patients increase or reduce the cost of treating a specific disease? It is difficult to assess the aggregate cost of a therapy for the country at large because of marked regional differences in charges for hospitalization and services. Let us compare the costs of a minimally invasive procedure-translu- minal angioplasty and an operative approach- coronary bypass to those of a common serious disease, myocardial infarction (Wittels et al., 19909. An angioplasty and its follow-up over 5 years cost approximately $27,000, compared with $32,500 for coronary bypass surgery. The absolute numbers are not important except to acknowledge that such studies can be done; what these studies do not reveal, however, is the cost to society if the disease had been left untreated. Each procedure has shown efficacy in selected patients; thus it is likely that such studies will be done with the modern tools of cost analysis. The cost savings as a result of an earlier death are likely to favor nontreatment-a frightening thought as health care researchers attempt to develop cost-effectiveness algorithms. Perhaps a better way to assess the benefits of costly therapies is to compare the cost of a therapy that is definitive in curing a disease with another that supports the management of a chronic disease. Such studies of the treatment of end- stage renal disease have been done and have even reached the halls of Congress. Congressman Fortney "Pete" Stark of California's 9th District and chair of the House of Representatives Subcommittee on Health recently stated that "each successful (renal) transplant saved Medicare $19,656 per

SURGICALTECHNIQUES AND THE CHANGING ECONOMY 239 year per patient.''] Again, the numbers are not important; what is important is that data derived from clinico-economic studies have reached key deci- sion makers in Congress. Cost-benefit analysis should be targeted toward the benefits that will be gained from continued improvement in definitive therapy and the potential benefits to be derived from the knowledge acquired through research and development. The treatment of end-stage diseases will always be expensive (Garner and Dardis, 1987~; thus, it was thought that prevention of costly disease processes would be the only hope for decreasing the rate of increase in health expenditures in the years ahead. Recent studies, however, have suggested that prevention may not necessarily lead to cost-reducing effects (Russell, 1986~. THE CASE OF GALLSTONES To address more specifically the issue of cost containment and surgical intervention, this section considers the dramatic changes that are occurring in the treatment of gallstones, a common, easily quantifiable disease (Roslyn and DenBesten, 1990~. It is estimated that more than 20 million people in the United States have gallstones. In addition, a million new cases are identified each year. Several unique features of gallstones should be borne in mind. First, if the stones stay within the lumen of the gallbladder, the patient usually does not know that they are there. Indeed, approximately half of the people with gallstones are asymptomatic; only 15 percent will suffer a potentially life-threatening complication. The most common com- plaint is that of severe right-sided upper abdominal pain, a symptom called biliary colic. Once a patient with gallstones has biliary colic, he or she is likely to have subsequent episodes, which denote the passage of stones from the gallbladder. Such patients are then at risk of developing the severe complications of acute cholecystitis, cholangitis, and gallstone pancreatitis. Until a few years ago, the only definitive treatment of symptomatic gallstones was removal of the gallbladder through an incision in the abdo- men, a procedure called a cholecystectomy (McSherry, 1989~. An improved understanding of the pathogenesis of cholesterol gallstones, the most com- mon stones seen in Western countries, has led to several alternatives to this type of surgery: (1) oral dissolution, (2) direct dissolution, (3) lithotripsy, and (4) lithotomy. Simultaneously with improved understanding of the 1 In a letter dated September 13, 1991, Congressman Stark writes: "I'm not sure where I made the comment on the savings to Medicare of successful transplants, but it sounds right for the pre-EPO [erythropoietin] period. The figure is obviously higher now, by about $4,000, and will be rising further as the composite rate is gradually adjusted for inflation." Quoted with permission.

240 FRANK G. MOODY origins of gallstones have come dramatic advances in the ability to image and access the gallbladder and the biliary tree. Ultrasound, computer-as- sisted scanning, percutaneous transhepatic cholangiography, and endoscop- ic retrograde cholangiography have offered new approaches to the treatment of gallstones and their sequelae. Treatment options for symptomatic gallstones now range from simply taking two pills a day to removal of the gallbladder. Because therapies that leave the gallbladder in place have a recurrence rate of 20 to 50 percent, it could be argued that the gallbladder should he removf~.~1 in n11 n~ti~.ntc who are symptomatic. ~ ' ~ 1 its risks of death (0.2-l.0 percent) and of postoperative complications and pain. Moreover, the cost of hospitalization (5-7 days) is about $5,000 and is followed by a relatively long period of recovery (2-3 weeks). As one might expect, physicians and patients found the alternatives to surgery at- tractive when they were introduced several years ago; on the other hand, general surgeons were not particularly pleased, given that the alternative treatments represented a potential loss of income by decreasing the volume of one of the most common procedures they performed. This description should provide sufficient background to understand ~ ~ ~ ~ ~ r ~ ~ ^ -~ A ~ V ~ fur uperauve removal or the gamer Is not without what has happened to these newer, less Invasive therapies and how their use involves interplay with the medical profession, the research establishment (the National Institutes of Health and industry), regulatory bodies (the Food and Drug Administration and other public agencies), and third-party payers, public and private. Oral dissolution, the least invasive of the various thera- pies, is also the most limited in its therapeutic efficacy (Fromm, 1986~. Ursodeoxycholic acid (ursodiol), the bile salt used for this purpose, is al- most without side effects but it only dissolves small stones, preferably those that are single, noncalcified, and floating, characteristics that suggest a high concentration of cholesterol. Larger, noncalcified stones can be fragmented by extracorporeal shock wave lithotripsy, a procedure that focuses the ener- gy of sound waves generated outside the body on a gallstone or stones (Sackmann et al., 1988~. Residual fragments that the body does not pass spontaneously are dissolved with ursodiol. Oral dissolution, with or without lithotripsy, is time-consuming and requires the ingestion of ursodiol for several months or, in some cases, years. This type of therapy is ineffective in noncompliant patients and unpopular in a health delivery system that is concerned with costs and immediate results. Lithotripsy for gallstones, although initially promising, has not fulfilled the expectations of patients, physicians, and the regulating bodies concerned with efficacy and cost of the technology. Some lithotrip- ters cost more than $1.5 million to purchase and install. Trials of this innovative therapy have been initiated but are currently incomplete. It appears that at one year retention of residual fragments even with bile salt

SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 241 therapy is such that this form of therapy must be considered relatively cost- ineffective. Nevertheless, there may be a subpopulation of patients with gallstones that could be cured either by lithotripsy alone or by a combina- tion of lithotripsy and oral dissolution. Direct dissolution of gallstones by the instillation of methyl tert-butyl ether, a liquid at body temperature, is also a relatively effective treatment (Thistle et al., 1989~. Among its advantages are that it requires no general anesthesia and only a brief stay in the hospital; it also has the potential to treat a larger stone burden than can be treated by oral dissolution with or without lithotripsy. The technique, however, is time-consuming, tedious, invasive (although minimally so), and potentially toxic. THE SYNERGISM OF NEW TECHNOLOGY The enthusiasm for developing alternatives to cholecystectomy has been dramatically tempered by a recent surgical innovation, laparoscopic chole- cystectomy, which involves the removal of the gallbladder through small puncture wounds made at appropriate sites in the upper abdomen. The technique requires tubular entry ports for a camera and the operative instru- ments; the procedure is then performed by visualizing the operative manip- ulations on a television screen. This approach has rapidly replaced open cholecystectomy for the treatment of symptomatic gallstones, and its devel- opment has greatly reduced interest in alternatives to cholecystectomy (Reddick and Olsen, 19891. An analysis of the interplay between these competing innovative thera- pies reveals several unique characteristics of the current health care scene. For example, surgeons adopted and perfected the laparoscopic approach to cholecystectomy so rapidly that the device industry found itself incapable of satisfying demand for the devices. The public learned of the potential of the procedure through the media before most surgeons were aware that a cholecystectomy could be done in this less invasive way. Yet within months, surgeons were learning the technique and utilizing it in their practices. Its popularity derives from its shorter hospital stay (only overnight) and a much shorter period of recovery compared with open cholecystectomy; in addi- tion, the small incisions required in the procedure are much less painful and disfiguring. Thousands of laparoscopic cholecystectomies have been per- formed since the first use of the procedure in 1987. Its rapid displacement of open cholecystectomy is somewhat surprising, because it requires gener- al anesthesia, takes longer to perform, has a higher rate of bile duct injury, and results in comparable mortality (Peters et al., 1991~. Possibly its high rate of adoption in everyday surgical practice derives from the relative lack of success of the alternatives when tested in formal clinical trials. Another factor may be the frustration of general surgeons who were forced to sit on

242 FRANK G. MOODY the sidelines during the evaluation, often by nonsurgeons, of these poten- tially less invasive ways to treat gallstones as patients were entered into clinical trials. THE DYNAMICS OF INNOVATION The recent evolution of treatments for gallstone disease emphasizes the interplay of public demand, payers' preferences for less costly alternatives to cholecystectomy, professional interest, and innovation. Lithotripsy for the treatment of gallstones has fallen out of favor because of its great ex- pense and the problem of fragment retention. Oral dissolution by the inges- tion of ursodiol, although safe, is effective in only a small number of pa- tients who have small (<3 mm) floating gallstones. Percutaneous dissolution has not progressed beyond early phases of development. All of the alterna- tives to cholecystectomy have been superseded by the current enthusiasm for laparoscopic cholecystectomy, a procedure that has been adopted into surgical practice without formal evaluation and assessment of outcome. With this new technique, surgical treatment is again the treatment of choice for the majority of patients with symptomatic gallstones. There remains a small group of patients who might benefit from alternative treatments for example, patients who are at risk of associated medical problems if anesthe- tized. The elderly, who have the highest incidence of gallstones as well as the greatest risk from their complications, might also benefit from a mini- mally invasive, yet effective, approach to their problem. It is in this popu- lation that oral and direct dissolution with or without lithotripsy may play a role. These techniques, however, are limited in their application because, as noted earlier, they are effective only in patients with cholesterol gall- stones and are best suited to patients with small stone burdens. Advances in the field are continuing; a recent example currently under evaluation is a device called a lithotrite. The lithotrite can be placed into the gallbladder lumen through a small puncture wound in the skin using local anesthesia (Miller et al., 1991~. Interventional radiologists who are experienced in percutaneous transhepatic cholangiography, a commonly performed procedure, can use the lithotrite with a high level of precision and safety. The lithotrite consists of a metal basket, small at its base, with a propeller, or impeller, as it is called. Rotations of the impeller at a rate of between 20,000 and 30,000 revolutions per minute create a vortex that draws gall- stones into the basket and leads to their rapid pulverization. The debris is then drained from the gallbladder, and after irrigation, its lumen is exam- ined by contrast radiography to demonstrate stone clearance. The device is unique in that it can fragment cholesterol as well as noncholesterol and calcified stones and thereby clear the gallbladder of stones with a single treatment and without general anesthesia. In preliminary trials, it appears

SURGICAL TECHNrIQUES AND THE CHANGING ECONOMY 243 to be not only safe but effective in the hands of biliary interventional radiol- ogists. Advances in technology have a remarkable interactive synergy. For example, the lithotrite has been adapted for use by surgeons to gain stone clearance from the gallbladder during performance of a laparoscopic chole- cystectomy. The ultimate worth of this technology will not be known until controlled trials are conducted. Even at this early stage of assessment, however, researchers have learned that the device will not accommodate large stones. The fragmentation of large stones by lithotripsy may offer a way to further extend the applicability of the lithotrite. The device may also solve the main problem associated with direct dissolution and lithotrip- sy: clearance of residual fragments from the gallbladder. The lithotrite emphasizes how novel techniques may enhance the usefulness of older ther- apies that during their own evaluations were found to be lacking in effec- tiveness. It also highlights the complexities involved in predicting the use- fulness of novel technology. SUMMATION The current focus on the costs of health care is likely to continue into the next century as the United States attempts to deal with the complex illnesses of an ever-larger aging population. Life expectancy in the not too distant future will approach 100 years, and it is projected that there will be one elderly adult (>65) for each child by the turn of the century. It is imperative that we continue to seek new approaches to old problems and to adapt technology to the task. Although prevention of disease is the goal being sought, the realities and consequences of disease as it exists in each patient must nevertheless be addressed. There should be little argument with the concept that the treatment for each patient should be the one that is most effective and safest. Thus, risk-benefit ratios should take precedence over cost-effectiveness concerns; cost-effectiveness analysis should include an assessment not only of the immediate outcome and the financial resources required to accomplish it but of the ultimate impact of the resolution of the problem as it relates to future general costs and benefits to society. Managed care, for better or for worse, is growing in popularity as a solution to the rising cost of health care. At issue is whether controls will be applied at the site of care or at some central point by the establishment of general budgets for service centers, such as exists in Canada. The way surgery is practiced in this country would be significantly and probably negatively affected by the latter kind of system, because the volume of services would be restricted by the dollars available in the budget. The American public has become accustomed to receiving the benefits of mod- ern health care in a timely fashion. Unfortunately, the sheer expense of

244 FRANK G. MOODY providing the ultimate in therapy on demand has denied a large segment of our population access to even the basic rudiments of medical care. Specialization has provided surgeons a way to perfect their skills and to develop techniques for treating complex problems. If carried to an extreme, however, it could deprive the public of broadly trained physicians who have the breadth of knowledge and skills to treat the majority of conditions that occur in most communities. With regard to innovation and the development of innovative therapies, specialization and its demands for new products are the driving forces be- hind the development of safer, more effective, and more cost-effective ther- apies. As outcomes research is further refined and applied to the assess- ment of surgical results, it is likely that specialized services will be regionalized. Cardiac surgery, trauma care, and organ transplantation have already moved in that direction, and it is likely in the future that the treatment of severe abnormalities of other organ systems will follow suit. Optimism is needed during this transition from an inefficient, highly personalized, and relatively expensive health care delivery system to one that with further refinements in surgical techniques and knowledge of the origins of disease will lead to a healthier, more productive population. The increased availability of public and private funds that would result from better health of the citizenry should go far in covering the expense of main- ta~ning the health of those living in this country; the development of more effective, safer surgical techniques would clearly contribute to achieving this goal. Economic considerations and their political implications should not be allowed to be a major deterrent to the health of a nation as richly endowed with human and physical resources as the United States. REFERENCES Barrey, J. D. 1933. Lithiasis. In: B. Lewis, ed. History of Urology, vol 2. Baltimore: Williams and Wilkins, pp. 1-25. Berte, E., Buzdar, A. U., Smith, T. L., and Hortobagyi, G. N. 1988. Bilateral primary breast cancer in patients treated with adjuvant therapy. American Journal of Clinical Oncology 11:114-118. Cello, J. P., Grendell, J. H., Crass, R. A., Weber, T. E., and Trunkey, D. D. 1987. Endoscopic sclerotherapy versus portacaval shunt in patients with severe cirrhosis and acute variceal hemorrhage. New England Journal of Medicine 316:11-15. Fromm, H. 1986. Gallstone dissolution therapy. Current states and future prospects. Gastro- enterology. 91: 1560-1567. Garner, T. I., and Dardis, R. 1987. Cost-effectiveness analysis of end-stage renal disease treatments. Medical Care 25:25-34. Kumar, S., Stauber, R. E., Gavaler, J. S., Basista, M. H., Dindzans, V. J., Schade, R. R., et al. 1990. Orthotopic liver transplantation for alcoholic liver disease. Hepatology 11:159- 164. McSherry, C. K. 1989. Cholecystectomy: The gold standard. American Journal of Surgery 158: 174-178.

SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 245 Miller, F. J., Rose, S. C., Buchi, K. N., Hunter, J. G., Nash, J. E., and Kensey, K. R. 1991. Percutaneous rotational contact biliary lithotripsy: Initial clinical results with the Kensey Nash lithotrite. Radiology 178 :781-785. National Institutes of Health. 1991. Consensus Statement for Gastrointestinal Surgery for Severe Obesity. Bethesda, Md.: Office of Medical Applications of Research. North American Symptomatic Carotid Endarterectomy Trial Collaborators. 1991. Beneficial effect of carotid endarterectomy in symptomatic patients with high-grade carotid stenosis. New England Journal of Medicine 325:445-453. Peters, J. H., Ellison, E. C., Innes, J. T., Liss, J. L., Nichols, K. E., Lomano, J. M., et al. 1991. Safety and efficacy of laparoscopic cholecystectomy. Annals of Surgery 213:3-12. Ravitch, M. M. 1981. A Century of Surgery: The History of the American Surgical Associa- tion. Philadelphia: J. Lippincott. Reddick, E. J., and Olsen, D. O. 1989. Laparoscopic laser cholecystectomy. Surgical Endos- copy 3:131-133. Resnick, R. H., Iber, F. L., Ishihara, A. M., Chalmers, T. C., and Zimmerman, H. 1974. A controlled study of the therapeutic portacaval shunt. Gastroenterology 67:843-857. Rikkers, L. F. 1982. Operations for management of esophageal variceal hemorrhage. Western Journal of Med. icine 136: 107- 121. Rikkers, L. F. 1990. Portal hypertension. In: F. G. Moody, ed. Surgical Treatment of Digestive Disease, 2nd ed. Chicago: Year Book Medical Publishers, pp. 363-380. Roslyn, J. J., and DenBesten, L. 1990. Gallstones and cholecystitis. In: F. G. Moody, ed. Surgical Treatment of Digestive Disease, 2nd ed. Chicago: Year Book Medical Publish- ers, pp. 253-275. Russell, L. B. 1986. Is Prevention Better than Cure? Washington, D.C.: The Brookings Institution. Sackmann, M., Delius, M., Sauerbruch, T., Hall, J., Weber, W., Ippisch, E., et al. 1988. Shock-wave lithotripsy of gallstones. New England Journal of Medicine 318:393-397. Schwartz, W. B., and Mendelsen, D. N. 1991. Cost containment in the 1980's. New England Journal of Medicine 324: 1037- 1042. Showstack, J. A., Stone, M. H., and Schroeder, S. A. 1985. The role of changing clinical practices in the rising costs of hospital care. New England Journal of Medicine 313:1201- 1207. Thistle, J. L., May, G. R., Bender, C. E., Williams, W. J., Leroy, A. J., Nelson, P. E., et al. 1989. Dissolution of cholesterol gallbladder stones by methyl tert-butyl ether adminis- tered by percutaneous transhepatic catheter. New England Journal of Medicine 320:633- 639. Wennberg, J. E. 1990. What is outcomes research? In: A. C. Gelijns, ed. Medical Innovation at the Crossroads. Vol. 1, Modern Methods of Clinical Investigation. Washington, D.C.: National Academy Press, pp. 33-46. Wennberg, J. E., Mulley, A. G., Jr., Hanley, D., Timothy, R. P., Fowler, F. J., Jr., Roos, N. P., et al. 1988. An assessment of prostatectomy for benign urinary tract obstruction. Jour- nal of the American Medical Association 259:3027-3030. Wittels, E. H., Hay, J. W., and Gotto, A. M., Jr. 1990. Medical costs of coronary artery disease in the United States. American Journal of Cardiology 65:432-440.

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The U.S. health care system is in a state of flux, and changes currently under way seem capable of exerting sizable effects on medical innovation.

This volume explores how the rapid transition to managed care might affect the rate and direction of medical innovation. The experience with technological change in medicine in other nations whose health care systems have "single-payer" characteristics is thoroughly examined.

Technology and Health Care in an Era of Limits examines how financing and care delivery strategies affect the decisions made by hospital administrators and physicians to adopt medical technologies. It also considers the patient's stake in the changing health care economy and the need for a stronger independent contribution of patients to the choice of technology used in their care.

Finally, the volume explores the impact of changes in the demand for medical technology in pharmaceutical, medical device, and surgical procedure innovation.

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