[Reprinted with permission from Minnesota Medicine, November 1994. Copyright 1994, Minnesota Medical Association.]

Taking The Pulse Of Medical Technology

Minnesota is a leader in medical technology, with hundreds of companies creating products and jobs. Will health system reform put innovation--and maybe our economy--at risk?

by William Hoffman
Assistant to the Director
Biomedical Engineering Center
University of Minnesota

Innovation in medical technology was simpler in the beginning. Just six weeks after pioneering open-heart surgeon C. Walton Lillehei described what he had in mind to his electronics repairman, Earl Bakken, he was holding the first wearable, battery-powered pacemaker.

Bakken had modified a metronome circuit design he found in Popular Electronics, matching the rhythmic pulse it produced to the human heartbeat. Within three years, Bakken's company, Medtronic, was selling implantable pacemakers for $375 each. That was 1960.

But medical miracles no longer happen the old-fashioned way. Government regulation has done the most to change that, bringing with it strict standards of safety and efficacy and lots of costly delays and red tape. Today medical technology is blamed for contributing in a major way to the rising costs of health care, which now consumes nearly 15 percent of the federal budget, three times more than in 1960. Health system reform initiatives could add to already burdensome regulation, threatening that delicate human element--the willingness to take a risk--without which innovation itself goes on the critical list.

"Today the innovative process is long and costly," says Paul Citron, vice president of science and technology at Medtronic, Inc. "It takes 10 to 15 years and millions of dollars from the 'gleam in the inventor's eye" for a product to reach the marketplace. Each step in the process is taking longer and longer."

In the beginning, taking the invention of the pacemaker as an example, the number of unknowns was enormous. But a surgeon and an engineer, exercising their best judgment, came up with a plausible approach to remedy a life-threatening condition. "The technology turned out to be clearly beneficial to the patient," Citron says. "You can't get a critical technology to a patient in anywhere near that speed today. And there is a price to be paid for moving too slowly."

It is ironic that the tide of health system reform is sweeping across the country and around the world at a time when more people are living longer with a better quality of life, Citron says. "Mean survival continues to move up every year. Medical technology has played a direct role in restoring patients to full and more productive lives. And that's the right role."

Also ironic, in Citron's view, is the expectations people have of medical technology. "These therapies are used in situations where the most ideal system--the body's own--has failed. Yet we expect medical technologies to perform flawlessly. That's asking a lot."

People associate advanced medical technology with high-quality medicine. Medicine, in turn, has become more and more dependent on new medical technology for its clinical and prestige value. It is no accident that Minnesota has a long and illustrious history in the development of both high-quality health care and medical technology, and it has a lot at stake economically. Figures from the state Department of Trade and Economic Development and Medical Alley, a regional trade association of health care product manufacturers, tell the story.

State's Medical Device Industry Impressive

Health care manufacturing is one the state's largest and fastest growing economic sectors, growing twice as fast as overall manufacturing and twice as fast as health care manufacturing nationally. The state's medical device production totaled approximately $1.6 billion in 1993. Minnesota is second to Delaware in concentration of medical manufacturing employment and is second in the proportion of the workforce employed in the medical device industry. Growth in employment among the some 200 medical manufacturers is twice the national average, and most of the jobs are relatively high paying. Minnesota ranks high on the list in the number of new medical device companies established each year, and it exports 50 percent more medical products than other states.

New figures from the Health Care Technology Institute, a Washington D.C.-area research organization, show that 14,231 Minnesotans were employed in the health care technology industry in 1992, the fourth highest nationally and representing growth of 5.4 percent over the previous year. State income tax revenues from these employees totaled nearly $24 million, fifth highest nationally.

The investment picture has been equally impressive. A study prepared for Minnesota Technology, Inc., a nonprofit corporation established to assist the state in becoming more competitive, shows that in 1993 the medical device industry accounted for the lion's share of venture capital investment in the state. At $34.8 million, investment in the industry was 36 percent of all capital investment in Minnesota, compared to a national average of 10 percent for medical devices and equipment. And while medical technology investors were cutting back nationally, Minnesota firms were reporting a 20 percent increase for 1992-93.

But that was then. Today investors are "nervous as all get out," says Arthur Kydd, president of St. Croix Management Group Ltd., a medical-venture capital investment firm in Minneapolis. "Health care reform is contributing in a big way to the general feeling of uncertainty."

Now, medical venture investment firms "are having one helluva time raising money," Kydd says, adding that surgeons, cardiologists, and other physicians who have been among the most active investors are shying away, even from promising cardiovascular start-up opportunities. "Investors are taking a 'wait and see' approach. This is true all the way up the chain--to the investment bankers. It's a terrible time for public and private financing," Kydd says.

But that could change, too. "Next year it could be completely different," he says. Health care legislation could turn out to be "innocuous" to the industry, giving investors on the fence the impetus they need to risk their money; or the uncertainty "could linger on for a long time."

Fact or Fiction? Technology Main Culprit in Rising Costs

Is medical technology really the main culprit in rising health care costs? "That may have been true five or ten years ago, but new medical devices are developed with serious consideration of costs," says a well-connected consultant who asked not to be named. "Manufacturers have to look more closely at what the market will bear. It used to be that you could add technology, boost the price and hype the product as value-added. But you can't raise the price if no one will buy the product."

Fancy new instruments or systems typically go through a turbulent, roller-coaster period of fierce competition, high-pressure sales, erratic pricing, and inadequate training of users, she says. A recent example is the crash of the market for laparoscopic surgical instruments after a frenzied boom a few years ago. The market is now on the rebound, but surgeons and hospital administrators are much more cautious, requiring proof of economic as well as clinical efficacy from manufacturers before making a purchase. "This happens all the time because of the free-market system. We end up paying for the 'overshoot.' But if we impose controls, we would not be able to innovate. It could take 10 years instead of a few years to get sorted out." By then, the consultant says, the best products would bear the name of foreign firms.

How much is medical technology contributing to the rise in health care costs? The only things experts agree on is that it does contribute and that figuring out how much is frightfully complex. That complexity is not done justice by news media stories that focus solely on powerful and expensive diagnostic imaging equipment and its proliferation from large urban health-care centers to community hospital and clinics.

Two recent studies commissioned by the Health Care Technology Institute (HCTI), a nonprofit organization formed by the Health Industry Manufacturers Association, show that medical technologies--medical devices, pharmaceuticals, and medical procedures--contribute between 11 percent and 15 percent of the annual increase in U.S. health care costs. General inflation, which has afflicted health care like a plague, accounts for half of the annual increase; 20 percent is due to health services price increases that exceed general inflation; and 10 percent is due to population growth. Calculations were based on data from the Health Care Financing Administration. The costs of purchasing the technology and using the technology were analyzed, as were technologies that increase costs, decrease costs, and cost the same as other alternatives.

Although the long-term impact of the studies remains to be seen, they have been well received, "particularly by people outside the industry, and that's very important," says Candace Littell, HCTI director. The studies were conducted by Health Economics Research, Inc. of Waltham, Massachusetts, and the Project HOPE Center for Health Affairs in Bethesda, Maryland, both independent research organizations.

Health Reform Threatens Innovation

Many physicians, politicians, and manufacturers question whether health system reform and the regulations it brings will undermine innovation. In the July-August issue of the Harvard Business Review Harvard economists Elizabeth Teisberg and Michael Porter and investment executive Gregory Brown, a former surgeon, write: "The national debate defines technology as the enemy and focuses on how to cut fat and eliminate waste in the current system with reforms like health plan buying alliances, consolidated networks, and price caps on drugs and devices. ...In fact, overconsolidation of networks and price restraints on or biases against new drugs and devices will undermine incentives for innovation."

Pharmaceutical, biotechnological, and medical device companies "are beginning to deliver cost-reducing innovations," they write, adding that health system reform "must build on this progress by creating still stronger incentives for both medical and managerial innovation." Innovation, they argue, is the "missing principle" in the current health system reform proposals and "the only true, long-term solution for high-quality, affordable health care."

That principle is echoed by Rep. Jim Ramstad, R-Minnesota, who has made medical technology innovation his rallying cry. A year ago, Ramstad and Tim Valentine, D-North Carolina, formed a "Medical Technology Caucus" in the U.S. House of Representatives. "As Congress reconstructs our health care system, it is critical to improve the ability of our researchers and entrepreneurs to bring to market life-saving and cost-saving technologies," says Ramstad in a news release from his Washington D.C., office.

Most of the recent health system reform proposals considered by Congress would have harmed innovation, in Ramstad's view. In September he said he was "relieved that the government-directed, regulation-heavy" proposals of President Clinton, House of Representatives Majority Leader Richard Gephardt, D-Missouri, and Senate Majority Leader George Mitchell, D-Maine, have been declared dead for this year. The plans would "severely damage the potential for further advancement of medical technology. Rigid price controls and a strictly defined mandated benefits package would hinder innovation and lock us into existing technology for years to come," says Ramstad.

Susan Foote, senior health legislative assistant to Sen. David Durenburger, R-Minnesota, and a national expert on medical device regulation and innovation, says there is a natural tendency for government bureaucracies "to move in a regulatory direction," which in turn diminishes the creativity and dynamism of the private sector. Federal or state health system reform policies that define strict benefits packages will have a difficult time "resisting expansion into price controls," she says.

In a commentary titled "Technology and Health Reform: A Legislative Perspective" published in the summer 1994 issue of Health Affairs, Durenberger and Foote argue that current policies encourage costly overuse of technology and that the marketplace is best equipped to make needed reforms: "In a medical market, the creative and effective use of technology will distinguish successful (health) plans from unsuccessful ones. Let plans compete on how well they use technology to produce value."

Expressions of concern, worry, anxiety, even panic can be heard along Medical Alley. Most are related to U.S. Food and Drug Administration (FDA) delays, the prospect of government user fees for medical devices, industry downsizing, product liability, and the unavailability of critical polymers used as biomaterials in medical implants (major biomaterials manufacturers are leaving the business in the wake of class action lawsuits against manufacturers of silicone breast implants and their suppliers). But health system reform is a key issue.

"It depends whether you want to paint the picture black or white," says Tom Meskan, Medical Alley president and executive director. Minnesota has between 400 and 600 medical-related institutions in geographic Medical Alley, which runs from Rochester through he Twin Cities to Duluth. Eighty percent of medical device manufacturers have fewer than 50 employees and are locked into day-to-day concerns about getting their products to market, Meskan says.

"State reform [the 1993 MinnesotaCare Act] has the potential to have significant impact on medical technology. There is a Health Technology Advisory Committee that will review specific procedures. Although the committee does not have regulatory power, it will have an impact on what technologies integrated service networks adopt. This is part of the drive for information.

"It's no longer enough to demonstrate safety and efficacy," says Meskan. "Device manufacturers and people with new procedures are going to have to demonstrate cost-effectiveness, too."

Concerns about federal health care legislation, Meskan says, center around four questions: Will there be a National Health Board and, if so, what will be its makeup and powers? How will benefits be defined? Will there be price controls? And what will be the role of research?

"The No. 1 concern would be a National Health Board," Meskan says. "Is there going to be one? Most of the industry hopes the answer is no, but if there is one, how much will it allow for local flexibility on the particular products or procedures that might be covered?"

Price controls "speak for themselves," he says. "The device industry tends to be pretty R&D intensive, and that could be problematic. If you restrict prices too much, where are you going to get the investment money to continue to advance your products?" Under a system of capitated payment, one of the features of managed care, clinics and laboratories are transformed from revenue centers into cost centers and are more impervious to traditional sales approaches. "It will have to be a different kind of sale. It will have to be better articulated to a greater number of people besides physicians--people such as materials managers, administrators, and committees that may include people from the business community," Meskan says, adding that demonstration of how a device saves money may determine its fate.

The effects of possible federal legislation on research funding is another serious concern to Medical Alley companies, Meskan says. Many of the ideas that lead to medical technology products have their origin in university research laboratories, and teaching hospitals are critically important for carrying out clinical research on new technologies. Cost-containment measures that result in lower funding for basic and clinical research will have a director impact on the ability of companies to develop new technology and bring products to market, he says.

Health system reform is already reducing the time available physicians to conduct clinical research, which has been its major impact on academic health centers, says William Brody, M.D., provost for the University of Minnesota's Academic Health Center and former head of radiology at the Johns Hopkins School of Medicine. Brody, who is also a biomedical engineer and entrepreneur, says that physicians' time for such research used to be funded by an internal cross subsidy from patient care fees. "With reduction in reimbursement, clinical departments do not have the financial ability to underwrite faculty time for conducting research and teaching courses," he says.

Despite concerns about "the dark side" of health system reform, Meskan is optimistic. "We're lucky in Minnesota because there are a lot of people who understand the business," he says. "They have come out of the device industry and made some money and think they know how to continue to pursue that. They have a product idea and believe they can make it happen. I look upon that as seed corn. We've go an excellent device business infrastructure. This bodes well for the industry here, relative perhaps to device industries in other states."

To the extent that federal legislation is regulatory, small companies and venture companies will feel it first. "Government regulation in health care could and is affecting innovation by restricting new entries and start-ups," says Catherine "Kye" Anderson, chairman, president and chief executive officer of Medical Graphics Corp. in St. Paul, a leading innovator in cardiorespiratory diagnostic systems that employs 120 people. Large firms are better able to deal with government regulations because they can afford to do clinical trials overseas, Anderson says. According to the Health Industry Manufacturers Association, a growing number of firms are doing just that. U.S. medical technology firms invested nearly $1 billion overseas in 1992, three times the amount of the previous year.

New Technology Can Reduce Costs, Too

Anderson believes medical technology can play a larger role in reducing costs and preventing disease. "We need to find ways through technology to reduce costs and keep people healthy. There's plenty of room in that arena," she says.

Funding agencies and foundations, which have helped to fuel the development and adoption of biomedical technologies, are taking the cue. Last year, the National Science Foundation and the Whitaker Foundation, the largest private funder of biomedical engineering research, launched a jointly funded research program, "Cost-Reducing Health Care Technologies." Grants are awarded to researchers working on "new or improved technologies that can reduce the cost of existing procedures or technologies in the delivery of health care." Applicants are required to provide a quantitative analysis of anticipated cost savings. One of the first funded projects was for development of a small, lower-cost magnetic resonance imaging (MRI) scanner. Conventional MRI machines can cost up to $3 million to buy and more than $1 million annually to operate.

Medical technology has gotten a "bad name" in the health system reform debate, says Peter Katona, Whitaker's vice president for biomedical engineering programs. "The main reason for the program is that we believe technology can help in reducing the costs of health care. This is extremely important for the future of technology in medicine." Katona says a similar research program involving the Whitaker Foundation and the National Institutes of Health will be announced soon.

Clinical trials of medical technologies are addressing cost-effectiveness issues as well as efficacy and safety. A multicenter clinical trial of 198 patients using an outpatient drug delivery device manufactured by SIMS Deltech, Inc., of St. Paul showed that hospital stays could be reduced by up to six days. Home-based intravenous antibiotic therapy via a computerized delivery system "is a highly cost-effective, well-tolerated approach to the management of infections, with efficacy comparable to hospital-based treatment," wrote Donald Poretz, M.D., in the introduction to a series of reports published in the August supplement of the American Journal of Medicine.

The studies were supported by a grant from the pharmaceutical manufacturer of the antibiotics. In William Brody's view, insurance companies also should support clinical research. "It seems to me that payers benefit from the cost-effective use of new technology and have a vested interest in preventing the introduction of technology that is not cost-effective," he says. "They should be willing to reimburse academic health centers to evaluate and test new technology. This needs to be done on a selective basis so that the technology doesn't proliferate before it is adequately evaluated."

Health system reform, whether driven by market forces or legislation or both, will require greater scrutiny of costs in the development, manufacture, purchase and use of medical technologies. The FDA is reported to be expediting device applications if they demonstrate cost savings, even though cost is not part of the agency's formal review. A set of guidelines is currently being developed by Medical Alley's "Task Force on Cost Effectiveness" made up of representatives from device and pharmaceutical companies, the Business Health Care Action Group, integrated service networks, hospitals, physicians, academics, ethicists, and the state commissioner of health.

"We want to provide something practical and timely that will serve large health care systems--not only here in Minnesota, but around the country," says Andrew J. K. Smith, a Plymouth neurosurgeon and task force chair. There is "individual and collective excitement" about what can be accomplished, he says. The task force report will be finished in late winter or early spring.

At the Heart of the Debate

At the heart of the debate over the role of technology in medicine is the dilemma over what people want their society to be versus what they want available to them in time of personal need. No one has described the dilemma more compellingly than the late Lewis Thomas, the renowned physician-writer and philosopher of science.

In the early 1950s, when Earl Bakken was building a business out of a garage in northeast Minneapolis and C. Walton Lillehei was leading the development of open-heart surgery, Thomas was right next door directing the pediatric research laboratories at the University of Minnesota Heart Hospital. Thirty years later, a pacemaker in his chest, Thomas said "I am exceedingly pleased with my machine-tooled, obedient, responsive self. I would never have thought I had it in me, but now that I have it in me, ticking along soundlessly, flawlessly, I am subject to waves of pure vanity."

In a chapter entitled "My Magical Metronome" in his book Late Night Thoughts on Listening to Mahler's Ninth Symphony, Thomas confessed that he wasn't really interested in how a pacemaker works. "As long as it works, and it does indeed, I prefer to be as mystified by it as I can be. ...I suppose I should be feeling guilty about this. In a way I do, for I have written and lectured in the past about medicine's excessive dependence on technology in general, and the resultant escalation in the cost of health care. I have been critical of what I have called 'halfway technologies,' designed to shore things up and keep flawed organs functioning beyond their appointed time. And here I am, enjoying precisely this sort of technology, eating my words."