Alfred Hitchcock provided a great definition of the difference between surprise and suspense. It goes like this: If a bunch of guys are playing poker and a bomb goes off under the table, that’s a surprise. If, however, we know that the bomb is there and we watch the timer tick down while the men play on, that’s suspense.
When Warren Buffett said that the ballooning costs of healthcare “act as a hungry tapeworm on the American economy,” the financial markets acted like a bomb went off and the media covered the story like none of us knew it was there.
Let me save you the suspense: egregious profiteering in the medical-industrial complex is the head of the tapeworm that Buffett spoke about. It’s at least one area of healthcare where complaints about the industry’s notorious lack of transparency doesn’t apply, because the maneuverings of special interests often happen in plain sight, sometimes facilitated by the regulating agencies themselves.
When policy decisions made by a government agency have the effect of inspiring competition, industry watchers applaud. When product approvals made by an agency, like the U.S. Food and Drug Administration (FDA), have the effect of creating windfalls for major pharmaceuticals and device manufacturers, we take it in stride. But when those same mega-manufacturers that plainly benefit from highly regulated environments engage in business practices that are economically irresponsible, at a minimum, the situation requires a high priority review.
Because the pharmaceutical industry has provided popular fodder for decades, I’ve decided to put the spotlight on medical devices — more specifically, the arc of the medical device reprocessing industry.
A Value-Adding Conundrum
As late as 2000, most hospitals were fully engaged in device reprocessing. To save money, they did it themselves, honing their practices in-house and doing so without FDA oversight. Hospitals came to rely on those savings — about half the cost of the devices purchased new — and plowed it back into all sorts of programs that directly benefited patients.
For obvious reasons, the OEMs didn’t like it, so their first move (a decision made back in the 1980s) was to label many of their devices “single use.” The hospitals cried foul since the single-use devices (SUDs) were exactly the same as the “old” devices they had already proven reusable.
For perspective, more than 20% of the devices used in medical procedures are currently viewed as eligible for reprocessing. Cardiovascular medical devices (e.g. steerable sheaths, guide wires and catheters) still hold maximum revenue share due to the high prevalence of cardiovascular disease and the associated surgical procedures. But the opportunity goes well beyond the heart, and logically, if the OEMs designed more of their devices for reusability, the candidate pool would increase.
But I digress. In its second move to confound device reprocessing, the medical device OEMs launched campaigns aimed at forcing the FDA to regulate it. The OEMs attacked hospital practices, claiming that their products were being recycled beyond acceptable limits and lacked appropriate quality control. The FDA investigated and despite results indicating that hospital device reprocessing didn’t appear to be a problem, its conclusion stated that more regulation was required.
But the FDA’s decision did not result in the “win” the OEMs had hoped for. In fact, it had the opposite effect. Because its new regulations held the emerging reprocessing industry to higher quality standards than the OEMs, the resulting data soon revealed that reprocessed SUDs were better than the originals. (As reported in the Journal of Medical Devices, OEM devices were nearly five times more defective than their reprocessed equivalents.) Essentially, the FDA’s decision to regulate helped to establish the integrity of the third-party device reprocessing industry — definitely not the outcome the OEMs had in mind.
More Unintended Consequences
Several independent medical device reprocessing businesses were quickly and successfully established, aligning themselves with thousands of hospitals that had come to rely on the savings. The industry took off, and just as fast, its markets started to consolidate. Smaller companies rolled up into larger ones that specialized around certain procedural device categories, ensuring capacity to cover an ever-broadening spectrum of demand. The consolidation resulted in accelerated turns, increasingly better product quality and significant hospital savings (upward of a million dollars a year for a medium-sized hospital).
Right on cue, however, and in a move that was then interpreted as one of resignation, the OEMs acquired the reprocessing industry’s largest players. In fact, the acquiring OEMs dedicated new divisions anchored by their acquisitions. Along with highlighting the corporate social responsibility (CSR) angle, they promoted the environmental and cost savings benefits these new companies would deliver (in that order) and talked about how they were going to take the medical device reprocessing industry to the next level.
But that’s not what happened. Although the OEMs succeeded in buying back control of the industry they created by their failed SUD strategies, they didn’t run with it. Instead, the OEMs essentially buried the industry by turning off the engine that made it go.
In a pure reprocessing context, the FDA 510(K) clearance process is that engine. The 510(Ks) is the currency of the reprocessing industry. A 510(K) is a premarket submission made to the FDA to demonstrate that the device targeted for reprocessing is the substantial equivalent to the OEM device already approved and legally marketed. But after the OEMs bought the industry, 510(K) clearances all but dried up.
For example, industry leader Stryker bought privately held Ascent in 2009. Ascent was the reprocessing industry’s largest independent. Even including Ascent’s established portfolio of clearances in cardiology, Stryker has averaged a little less than two additional clearances per year. J&J’s entrant, SterilMed, has received less than one per year. By contrast, Innovative Healthcare — the reincarnation of Ascent — has received 18 cardiovascular device clearances in just the last two years.
Despite the continued growth of the global device reprocessing industry (estimated at nearly 15% for the foreseeable future), that rate is anemic relative to what it could be. And predictably, the supply chain savings that helped define the industry’s business case are not being driven by the OEMs, but confounded by them.
Deja Vu All Over Again
So what we now have is a third attempt at making reprocessing an effective supply chain strategy. The reprocessing companies are returning to their roots in pursuit of the very same opportunities. The investment capital is flowing and the reprocessing technologies continue to evolve.
And because it’s all happening for a third time, the cycle has finally caught everyone’s attention. Even the FDA, which well describes itself as a “disinterested party,” can’t help but notice, in part because the OEMs have enlisted their support in its latest attempts to once again confound the industry.
To be clear, why the OEM-led reprocessing industry failed to drive reuse is not an FDA problem. The fact that hospitals refuse to look past short-term savings and not apply a total cost mindset to more of its purchase decisions is a big part of it as well. But that’s hard to do when the largest device suppliers — those with cross-category product capabilities — deliberately create complicating product and service bundles that prevent hospitals from taking advantage.
If It Walks Like a Duck…
According to the FDA, it is now working with the OEMs “to identify incremental improvements that will foster innovation in next generation reusable medical devices.” And while it would seem obvious that the initiative is a good thing, if not long overdue, there will be additional, unintended consequences if we don’t pay attention.
For starters, if you’re an OEM, making meaningless incremental device improvements is a tried and true strategy. But if you’re a downstream member of that same supply chain, they’re nothing but a problem. Among other problems it causes, for device reprocessors and hospitals alike, it makes it very difficult to effectively integrate a sustainable device reuse program.
To be clear, no one is against a meaningful device improvement. But when a product lifecycle is arbitrarily shortened for no good reason other than to protect profits, no one benefits except the OEM. For example, when the software that runs a medical device is intentionally written to shut down after a single use and the reprocessing clearance effort is stymied because the OEM refuses to provide the unlocking code, that’s a tactic that should be punished, not rewarded.
We’re already seeing OEM replenishment programs designed to contractually lock out the third-party reprocessors. In turn, we’re also witnessing how the OEMs are engineering the erosion of the supply chain savings opportunity that by all rights should be increasing.
By definition, this isn’t an FDA problem, but that doesn’t mean it couldn’t become instrumental in a solution. Likewise, hospitals know what’s going on, and given the market’s consolidation, they’re getting big enough now to weigh in and be heard.
The FDA is responsible for overseeing products that account for more than one-quarter of consumer spending in the U.S., including all prescription and over-the-counter medications, medical devices and our food and blood supply. It readily admits that it can’t keep up and it knows that its reliance on private funding sources (e.g., major OEMs) presents conflicts of interest. The FDA isn’t, however, designed to police business ethics that add burden to healthcare’s already beleaguered economy.
The reprocessing independents aren’t a tough read. They’re coming back and have declared their commitment to an aggressive R&D strategy. And the OEMs aren’t slouches, either, as the pace of meaningful innovation is healthier than ever.
As our nation’s top clinical watchdog, however, the FDA has the opportunity to help orchestrate an end to the medical device shell game currently being run by the OEMs. On behalf of U.S. taxpayers, it can work with lawmakers to prevent history from repeating itself (yet a fourth time) and establish some badly needed precedents specifically designed to stop such behavior.
To Warren Buffett’s point, we can no longer afford it.
Author: Tom Finn
Source: Spend Matters