Shakespeare’s play MacBeth opens with two witches uttering these words:
“When shall we three meet again? In thunder, lightning, or in rain?
“When the hurlyburly’s done, When the battle’s lost and won.”
The quote refers to the impending reunion of three sister witches intent on evil, but it struck me as a great metaphor for what the outcome of current efforts to reform healthcare must accomplish: the re-connection of incentives, both clinical and financial, among the three most critical constituents of our healthcare system: patients, payers and providers. If these incentives do not align, or meet again soon, as a result of seismic shifts underway, the U.S. economy is probably doomed to collapse under the financial weight of our current healthcare system dysfunction.
In fact, MacBeth felt like a completely appropriate metaphor to me as I contemplated what is going on within the medical device industry while I attended last weeks’ IBF MedTech Investing conference. The conference took place in Minneapolis, considered by many to be the ancestral homeland of much of today’s medical device industry. Minneapolis is not exactly Scotland (witness complete lack of hills), but it was host last week to a profoundly different kind of discussion than what usually takes places at medtech conferences. These conferences are usually dominated by discussions of new technologies and what’s hot, what’s not among device sectors. In contrast, the dominant discussion of this conference could be summed up by the famous MacBeth quote:
“Is this a dagger which I see before me, The handle toward my hand? Come, let me clutch thee.”
MacBeth utters these words while envisioning a dagger that he imagines using to kill he who gave him life and prosperity: his father the King. At the medtech conference, a key theme of the day was the vision that provider systems are having of the dagger they must use to kill what has given them prosperity for years: their current business models. How the changes in provider delivery systems will affect and are affecting medical device entrepreneurs, manufacturers and investors was much on the mind of conference speakers and participants.
“By the pricking of my thumbs, Something wicked this way comes.”—One of MacBeth’s three witches commenting as MacBeth returns from committing his crimes)
For years medical device manufacturers have managed to exist and prosper without much regard for the role of the payers or hospital administrators in purchasing decisions. By and large, as long as they could convince surgeons that their gizmo du jour was interesting enough, hospitals would welcome it and whether payment was forthcoming from insurers was not a big consideration. In today’s world, however, that has changed markedly and the payer community is coming at provider costs with a vengeance and is not afraid to get blood on its hands. For the first time in our medical system history, more than half of all providers work as employees of hospitals or integrated provider delivery systems rather than as solo practitioners in their own small businesses. Furthermore, these provider systems, which have long prospered by utilizing fee-for-service medicine to their advantage, are having the profound realization that business as usual isn’t going to cut it for long.
Both public and private payers have introduced a retinue of approaches to putting financial risk back into the hands of the provider systems and as a result providers are either in full retreat or, if they’re smart, trying to figure out how to change the way they do things to survive in the new world order. For those provider systems that rise to the occasion, they will for the first time be presented with an opportunity to make money by delivering care less expensively—in other words, they will profit by saving money and relying on less expensive products and services. If you are a medical device manufacturer, this is a pretty wicked picture.
“I go, and it is done; the bell invites me.” –MacBeth, upon hearing the sound of the bell that is his cue to put his murder plot in motion.
By way of example, Dr. John Sperling, professor of orthopedic surgery at the Mayo Clinic, spoke to the audience of 450 or so medical device professionals and let us know that they operate in a 100% fee-for-service world today, but expect to be transitioning to a world where at least 70% of their revenue will come from full risk capitation arrangements within 5 years. He said that Mayo is in a “state of controlled chaos” as they plan for a world of decreased reimbursement. Thus, they are plotting exactly what they need to do, including the adoption of plans that are already placing significant pressures on medical device manufacturers. Among their tactics are taking a dagger to historical price lists, reducing the number of vendors with whom they will do business, demanding increased volume purchasing discounts and applying evidence-based decision-making when thinking about which devices should be used in which circumstances. He talked about how providers are now thinking twice about using the “most advanced” technologies when an older cheaper one is available and the newer, more expensive product does not come with scientific proof of superiority. Another bell-related quote comes to mind here actually. To use a little poetic license: Medical device manufacturers: ask not for whom the bell tolls…if you are delivering barely noticeable product “enhancements” at high price points, it tolls for thee.
“Infirm of purpose!”—Lady MacBeth (commenting that MacBeth is weak in will/resolve despite having murdered the King, in other words, that he is waffling about whether he has done the right thing)
Dr. Heber Crockett, a sports medicine physician and medical device entrepreneur from New West Sports Medicine System in Nebraska (yes, there were corn jokes), described how his formerly 100% hospital organization now derives 45% of its income from wholly-owned services that occur outside of the hospital in outpatient settings, labs, etc. He described how the system used to hold monthly management meetings to discuss finance and regulatory issues that affect the business but now have to hold those meetings weekly to keep up with the onslaught of change. He talked about the importance of diligently planning for the future and being truly committed to making necessary changes–no waffling. “The healthcare practice is punitive if providers don’t pay attention and get prepared,” he commented in closing, implying that there is no room for waffling when it comes to revolutionizing provider business models. He added that their system is now using more generic drugs and devices, fewer implants (“avoid them whenever possible”) and moving procedures from inpatient to outpatient settings as often as practicable. They are also encouraging physician innovation to help to achieve the organization’s “mantra,” which he described as, in this order:
- Save the patient money
- Save the payer money
- Create a revenue stream for physicians
There was an almost audible gasp from the audience on this one. Clearly that is a mantra that does not support the traditional model of medical device industry prosperity. No doubt it sounded as fulfilling as “eye of newt, and toe of frog” to some sitting in the room.
Dr. Crockett’s message to the medical community was very much in line with Lady MacBeth’s “But screw your courage to the sticking place and we’ll not fail.” He basically said that those provider organizations which prosper in the changing healthcare economy will be those that, for all intents and purposes, suck it up and face bravely into a changing world; he implied that the provider systems that fail to do make the dramatic changes necessary to survive and thrive in the healthcare system of tomorrow will not face a good end.
“Therein the patient must minister to himself.”—MacBeth’s Doctor, commenting that there is no easy fix to Lady MacBeth’s psychological distress and that traditional medicine won’t heal the problems of the mind
A clear message from the Medtech Investing conference was that turning a blind eye to the changing healthcare delivery system or relying on traditional product development approaches cannot help the medical device industry recapture its halcyon past. Rather, the industry needs to minister to itself to find healthy profits in a changing world. With investment in new medical device companies down markedly over the past several years, entrepreneurs will have to think differently to recapture momentum. The investor panel, on which I participated with partners from Osage University Partners, Advanced Technology Ventures, Longitude Capital and OnSet Ventures, talked about the importance of less capital-intensive business models, development of economic and clinical evidence that a new device adds value to the system, and the need for true innovation among new products coming to market, not just incremental advancements.
“Chance may crown me.” –MacBeth, hoping that destiny or chance may take care of making him King but recognizing that he may have to do the dirty work to get his wish fulfilled.
There was also much discussion about the importance of payer/medical device company communication about reimbursement early in the development cycle, not when it is too late and the payer has already given a payment thumbs down. I had done a little research prior to the panel and found that the rate of positive medical device reimbursement decisions was markedly low in my random sample. I spoke to 5 large payers; one told me that they actually agree to reimburse nearly everything that CMS approves for reimbursement—they were the outlier. The other 4 payers approve between one and twelve new devices for reimbursement each year. If you are a new device hoping to achieve revenue growth that relies on insurance company reimbursement, chance may crown you, but you are far better off actively working early and often with payers to understand how to satisfy their needs in order to get your own met.
“Present fears are less than horrible imaginings.”–MacBeth (meaning that the fear you face from actual danger is not nearly as bad as the fear of imagined danger)
Clearly our healthcare system is changing and fast. Whether the Affordable Care Act succeeds or not legally, it is my humble opinion that the events that have been set in motion as a result of our broken healthcare economy will continue to move forward, shifting risk towards providers, forcing patients to engage in their own health, and amplifying the complexity of getting new medical technologies to market. While the changing environment for has created significant fears for the medical device industry’s future, there will undoubtedly be ways to prosper despite this. Success is not out of reach for the medical device community, particularly as our population ages and new opportunities arise out of the emergence of health IT/mobile health solutions, personalized medicine approaches, and the demand for better outcomes at lower cost. But change is inevitable, as is the imperative to introduce products that bring clinical and financial incentives into alignment across the landscape of healthcare participants. It is time for the medical device industry to face its fears and move strategically into the brave new world because it is coming, ready or not.
“What’s done cannot be undone”—Lady MacBeth