The reimbursement challenge for advanced prosthetics

We are aging, and inevitably that means that we - or at least some of our parts - are wearing out. Increasingly, there are demands for wider availability of "replacement parts" to restore physical functionality and quality of life. And while tissue engineering and stem cell research may hold the promise of biological replacement parts, grown to order from the patient's own cells, clinical realization of that promise remains in the fairly distant future. For years to come, advances in prosthetic devices will be the dominant mode for replacing the function of non-functional body parts or organs. Our imagination tends to be grabbed by the technology projects that aim at vital organ replacement - Abiomed's AbioCor Total Replacement Heart (apparently, excuse the expression, moribund), the various artificial pancreas projects that receive publicity from time to time (such as this one), liver replacement technologies, wearable artificial kidneys, etc. - but the real current action seems to be in the orthopedic arena, where basic technology is in place, but there are exciting innovations in the pipeline.

It seems reasonable to ask: "Who will pay for these prosthetic devices, and for which patients?"
The "who" is fairly clear. The population in need is primarily elderly and the dominant payer will be Medicare. The Medicare program has a long-standing and well-understood prosthetic device benefit (see Section 1834(h) of the Social Security Act), which provides payment for devices that replace the functionality of permanently non-functional body parts or organs. The benefit covers the obvious orthopedic prostheses for amputees, but also extends to implanted replacement knees, hips and other joints, external and implanted mechanical circulatory support devices, total parenteral nutrition (i.e. replacement of non-functional gut), ostomy and colostomy procedures and supplies, and a host of other technologies. For covered prosthetic devices, Medicare pays for any medical procedures required to initiate device use, the device itself, and any supplies and equipment required for ongoing functionality. To meet the "permanence" standard, the program requires clinical evidence that the impairment in function be "of long and indefinite duration" - the potential for recovery of function at some indeterminable future time is not disqualifying. For clinical procedures, implanted devices and professional services provided under the prosthetic device benefit, Medicare pays under the various payment schemes for hospitals and physicians. External prostheses and prosthetic device benefit supplies and equipment are paid under the rules and procedures for durable medical equipment, with a 20% patient copay obligation.

Coverage for prosthetic devices - determination of whether Medicare will pay for a particular device class, and if so under what circumstances - is subject to the conventional coverage standard of "reasonable and necessary". As usual, it is in the application of this standard that the potential for controversy resides. Even for vital organs, where complete failure means death, Medicare has struggled with three difficult questions:

1. What is the threshold - the degree of organ failure - for coverage under the prosthetic device benefit;
2. When is a device good enough - i.e. a sufficiently effective replacement - to warrant coverage; and
3. Is there a performance level for a prosthetic device beyond which incremental improvement is defined as unnecessary and therefore non-covered? How good a replacement are we willing to provide?

The most common implanted prosthetic devices are replacement hips and knees. We all know someone with one or more of these (I myself have two replacement knees). Qualification for coverage is straightforward - without the replacement the patient cannot walk; with it he/she can; every insurer finds it reasonable and necessary to cover replacement of these joints to restore mobility. And while the devices have been incrementally improved over the years to wear better, last longer, get placed easier and more precisely, etc. - all unequivically good things for patients, surgeons and insurers, there have been no substantial changes in the degree of functional capability they provide, and therefore no significant coverage issues raised. Insurers might resist a hypothetical new model knee that provides 10% increased functional longevity at a 50% increase in cost, but that value calculation is itself pretty straightforward.

A recent newsletter report about replacement ankles raised a significant coverage policy question. There are several FDA approved ankle arthroplasty (replacement) devices, a fair number of orthopedic surgeons want to do favor them and want to use them, but insurance coverage is rare. Dr. Michael Pinzur, writing in Foot & Ankle International, the official journal of the American Orthopaedic Foot and Ankle Society, wants to know why:

• "It seems curious that the FDA agrees with the [foot and ankle society] that total ankle replacement is a reasonable treatment option . . . while several insurance providers do not find ankle replacement as a reasonable treatment option for ankle arthritis," and
• "Should insurance companies make decisions on what treatments are appropriate and what treatments are deemed experimental?"

It turns out, of course, that FDA has never opined that total ankle replacement is a reasonable treatment option. Ankle replacement systems are class II devices. FDA has cleared at least three through the 510k process, but that signifies nothing about "reasonable" (a word and a consideration wholly absent from FDA marketing approval processes) and very little about anything else beyond the fact that the systems were deemed "substantially equivalent" to systms already on the market.

Medicare has no formal coverage statements on ankle arthroplasty, indicating that coverage may be granted on a case by case basis by the medical directors of the various fiscal intermediaries. But several major private insurers ( e.g. Anthem, Cigna,) provide detailed reviews of ankle replacement and why they don't cover the procedure: lack of reliable supportive clinical data (in part because FDA did not require clinical results for market clearance), uncertainty of superiority over surgical options, high percentage of re-ops required, lack of data based guidance concerning circumstances/sandards for use, etc. In short, advocates for ankle replacement haven't yet done what insurers reasonably expect them to do - make a strong clinical case for why and when the technology provides benefits beyond the available treatment alternatives. Contrary to Dr. Pinzur's view, this kind of decision is precisely what insurers always do, and what we need them to do.

The third question - when is a prosthesis too advanced to be necessary - is raised by recent developments in artificial lower limb prostheses, with the advent of computer- assisted joints which allow prostheses to perform in increasingly natural ways. New knee and ankle prostheses (like this one) under development will allow recipients almost perfectly normal looking gaits, much improved balance on uneven surfaces, and greatly decreased workload for given amounts of movement (translating into dramatic improvement in stamina). These prostheses will raise the ceiling on amputees' athletic performance and will provide them with capabilities increasingly approaching full normality, but functional and aesthetic. Wow! - but will insurers pay?

The answer, I think, is "Maybe someday, but not very soon." Insurers pay for prostheses that are reasonable and necessary to restore function, and the restoration target is predicated on the functional level deemed "normal" for the individual. We can see this in current coverage policies for non-computerized limbs, where Medicare and private insurers all provide prostheses capable of supporting the functional level deemed obtainable by the individual patient absent the amputation. A patient bedbound or wheelchair-bound for reasons unrelated to an amputation would not be covered for a prosthetic limb; one capable assisted ambulation becvause of cardiac conditions will be covered for the most basic prosthesis; one capable of ambulation on an uneven surface for extended periods of time will qualify for a more advanced prosthesis. Aesthetics do not enter the equation; neither does enhanced mobility for athletic or avocational purposes. Insurers will pay what is necessary for technology to help an amputee maximize his/her independance, maximize mobility in normal day to day activities, and get back to work ... but they will not pay more for appearances, or to facilitate running a marathon or climbing a mountain.

Normal function is socially defined. As these advanced technologies become available and their potential is more widely understood, it is likely that it will become increasingly difficult for insurers to maintain the "necessity" line where it is today. Technology invariably carries rising expectations with it. What is readily available and desirable becomes required. I think that will happen with advanced prostheses, aided by (relatively) decreasing unit costs as volumes grow. But not for a while, perhaps for a long while.

Medicare and Health Technology Innovation: Facilitator or Obstacle?

If we listen to the leadership of the Obama healthcare reform effort, we cannot help but be impressed by the consistent focus on the development and utilization of innovative health technologies as a significant element in efforts to improve quality and control costs. The theme was reiterated on May 11 by Margaret Hamburg, FDA commissioner-designate, in a confirmation hearing (Video here) before the Senate Health, Education Labor and Pensions Committee. And the Congress - at least the majority - is on board as well; witness full HELP Committe hearings on innovative healthcare delivery systems scheduled for May 13 and 14 .

At the same time, recent Medicare program regulatory publications and coverage policy determinations can only cause us to question whether the commitment to innovation has as yet penetrated to the operational level. Last week, advocates of personalized medicine and genetic tesing were handed a setback as Medicare issued a Proposed Decision Memo for Pharmacogentic Testing for Warfarin Response. Warfarin is a commonly prescribed anticoagulant used to prevent blod clot formation in at risk patients; at any given time, millions of Americans are on Warfarin therapy. The potential vlue of pharmacogentic testing for Warfarin sensitivity is outlined in the NCA:

Warfarin has a narrow therapeutic window, meaning that there is a small difference in dosage (at times, less than one milligram of warfarin per day) between dosing that is too little, just right, or too much. Standard clinical practice for warfarin titration requires periodic testing of its anticoagulant effect. This is assessed with the prothrombin time (PT) and the International Normalized Ratio (INR). In the PT/INR test, the ratio of the patient's PT to the mean PT for a group of normal individuals is calculated, and that ratio is then raised to a power which adjusts for differences among different types of reagents used in the test procedure. Commonly, the PT/INR is assessed frequently during the first few weeks or months while warfarin therapy is begun, and after that, less frequently when the patient demonstrates a stable response. More frequent testing may be required if the patient exhibits signs of over- or under-treatment or if the patient begins (or stops) taking another drug that is recognized to affect warfarin action or metabolism.

The putative use of pharmacogenomic testing is to predict a patient’s response to warfarin before the initiation of the drug. This would be an once-in-a-lifetime test, absent any reason to believe that the patient’s personal genetic characteristics would change over time.

The Warfarin test had been seen as a major step forward for genetic testing bcause of the size of the potential affected population and the therapeutic utility of the test - more accurate prediction of patient-specific Warfarin response wold, it was argued, hlp to reduce adverse events associated with over-dosing and/or under-dosing during early stages of the dose titration process. But Medicare's NCA concluded that "CMS believes that the available evidence does not demonstrate that pharmacogenomic testing to predict warfarin responsiveness improves health outcomes in Medicare beneficiaries", and proposed that "."Pharmacogenomic testing to predict warfarin responsiveness is covered only when provided to Medicare beneficiaries who are candidates for anticoagulation therapy with warfarin and only then in the context of a prospective, randomized, controlled clinical study when that study meets [specific detailed] standards." Coverage with Evidence Development (CED) - viewed by some as an entry wedge for promising but as yet unproven technologies, by others as one more way for Medicare to temporize in accepting innovations.

This week, the imaging community received a similar jolt, as CMS published its Decision Memo for Screening Computed Tomography Colonography (CTC) for Colorectal Cancer affirming a proposed non-coverage determination originally released in February. CTC advocates point to the sensitivity of the test, its lower cost, and its greater acceptability to the patient population as compared to colonoscopy. Research indicates that many individuals who ought to be screened are unwilling to undergo the colonoscopy procedure; CTC would increase the proportion of at-risk individuals screened, thereby identifying and allowing early treatment of more colorectal cancers; while CTC requires a confirmatory colonoscopy for "positives", advocates claim the total cost impact of using the new technology for initial screenings would also be beneficial.

During the formal 30 day comment period following that release, CMS had met (on March 3) with representatives of the American Cancer Society, the American College of Radiology, and the American Gastroenterological Association, as well as (on March 10) with representatives of the Medical Imaging and Technology Alliance; the Agency also received 357 written comments on the proposed non-coverage decision. Industry representatives and the supportive medical societies had been hopeful that their meetings and comments, along with new clinical data provided during the comment period, would change CMS' proposed policy.

A review of the formal comments is instructive. First. they were overwhelmingly in favor of coverage for CTC - "Of the total 357 comments, 16 expressed agreement with the proposed decision not to expand the colorectal cancer screening benefit to include coverage of the CT colonography screening test, and 337 commenters were opposed to it. Of the 357 total commenters, 101 were one of a couple of variations of form letters. Four commenters did not offer a specific opinion on whether on not the test should be covered for average risk individuals". CMS tends to discount the form letters, as they are generated by highly-interested third parties (usually the affected technology companies), but they do in fact provide a sense of the depth of spport from the general user communty.

Among organizations submitting comment, 6 favored coverage for CTC and 4 supported CMS' proposed noncoverage policy. CTC supporters were the American Cancer Society, medical societies the American College of Radiology (combined comments with the Society of Gastrointestinal Radiology and the Society of Computed Tomography and Magnetic Resonance) and the American Gastroenterological Association, device industry trade associations the Advanced Medical Technology Association (AdvaMED) and the Medical Imaging and Technology Alliance, and private insurer United Health Care. Those opposed were the American College of Gastroenterology (ACG), the American College of Preventive Medicine (ACPM), the American Society for Gastrointestinal Endoscopy, and insurance industry trade association American’s Health Insurance Plans (AHIP). A pattern is discernible: organizations that "win" if CTC is covered are favorable to the technology (CT companies, imaging organizations, radiologists); "losers" (gastroenterologists, many insurers) are opposed to coverage. There is also room for simpler disagreement (e.g. American Cancer Society, American College of Preventive Medicine).

It is tempting to view these coverage policy developments as institutional efforts by CMS to avoid incurring the costs asociated with new technologies. But a careful reading of the documents - which in both cases are lengthy, highly detailed, and heavily documented - leads to a more complex and less emotionally satisfying understanding. For warfarin testing, CMS essentially concludes that, whatever the accuracy of pharmacogenetic testing for dosage titration, the practical protocols for use of the test are not yet established and/or documented in a manner that provides clearevidence of superiority in clinical practice; more needs to be known about how to use the test before it can be seen as superior to current titration protocols; ergo CED:

A clinical study seeking Medicare payment for pharmacogenomic testing to predict warfarin responsiveness provided to the beneficiary pursuant to Coverage with Evidence Development (CED) must address one or more aspects of the following question.

Prospectively, in Medicare aged subjects whose warfarin therapy management includes pharmacogenomic testing to predict warfarin response, what is the frequency and severity of the following outcomes, compared to subjects whose warfarin therapy management does not include pharmacogenomic testing?

• Major hemorrhage
• Minor hemorrhage
• Thromboembolism related to the primary indication for anticoagulation
• Other thromboembolic event
• Mortality

Answer those questions in clinical practice for the Medicare population, the challenge is made, and then come back for broad coverage outside the research setting.

For CTC, CMS concludes that none of the published research on CTC effectiveness allows conclusions to be drawn about the utility of the test in the Medicare (> age 65) population, and that population differs in meanigful ways from the populations repoted in published research:

Overall, when considering potential benefits and potential harms, there is insufficient evidence to conclude that the use of CT colonography improves health outcomes in Medicare beneficiaries. Data on the health outcomes, potential benefits and harms from small lesions, extracolonic findings and radiation are needed from well designed clinical studies. In addition, with the higher prevalence of polyps in the older Medicare population, the rate of referral to optical colonoscopy is extremely important and also unknown at this point. If there is a relatively high referral rate, the utility of an intermediate test such as CT colonography is limited.

Medicare is consistent. Innovative technologies must be shown to be relevent to the Medicare population, and they must be shown to bepractically useful in the clinical setting. The lesson is clear: bringing innovative technologies into standard use is a more complex challenge than is sometimes assumed by developrs.

A Ray of Light for Fledging Companies: Mass. Life Sciences Center Announces First Accelerator Loans.

On April 29, 2009, the Massachusetts Life Science Center (MLSC), the focal institutional face of Governor Deval Patrick’s much-vaunted $ billion Life Sciences Initiative, announced its first Accelerator Program loans. As reported in Mass High Tech and the Boston Globe, seven firms received a total of $3.4 million in State funds designed to assist them in moving toward product commercialization.

The victorious seven, chosen from a pool of 88 applicants for the first round of Accelerator funding, represent a diverse cross-section of the Massachusetts life sciences industry cluster:

• Oncology drug company Eutropics Pharmaceuticals;
• Tissue engineering biotech InVivo Therapeutics;
• Molecular diagnostics company Good Start Genetics (a prize winner in Harvard Business School’s 2008 business plan competition;
• Device companies Pluromed and Wadsworth Technologies; and
• Biotech/pharma tools and services companies Spectra Analysis and Wolfe Laboratories.

Accelerator Program loans are limited to $500,000, and MLSC anticipates several rounds of loan announcements annually. The loans are intended to help companies move forward to the point where they can attract required private sector funding. Of the loan recipients announced on April 29th, none appears to have yet received venture funding (although Pluromed last year announced closing of a $4 million Series B financing from “private investors, including 7 current and former CEOs of U.S. medical device companies.”

The good news here is that the Life Sciences Initiative is actually beginning to put money directly into the hands of deserving startups. Governor Patrick’s announcement of the initiative, made at the 2007 Bio International convention in Boston, had inspired a high level of excitement in the startup community, excitement that gradually dissipated and turned, in some quarters, into cynicism as the actual composition and distribution of the $ billion “pot” began to take shape: too little truly new money (fully half was repackaging of existing programs); too much for pure research rather than enterprise development; too much locked into State university structures and too little in the hands of early stage entrepreneurs. Most importantly, it was unclear how any of the monies would be used to meet a problem acknowledged by the Governor and weighing heavily on startups – how to navigate the “valley of death” between academic grants and private sector investment.

The Accelerator Program loans are an imperfect solution to bridging the structural funding gap that so bedevils so many life science startups. They’d be “less imperfect” if there were more of them, if they were larger, and if they could be made earlier in the enterprise life cycle. But I think it is essential to acknowledge both the positive contribution the current loans can make, and the considerations that direct program monies to well-established startups – while maintaining the search for tools to address the still unmet needs of potentially valuable but still fragile very early stage enterprises.

Among the defensible reasons for MLSC not making grants or loans to the earliest stage companies, I’d focus first on the fact that MLSC lacks competence to make objective and intelligent decisions about the relative worth/potential of the earliest stage applicants. That is not a knock on the MLSC staff, and it is not something that can be fixed. No public agency will have the resources to evaluate the fundamental scientific underpinnings of a nascent life sciences enterprise – that’s the NIH’s bailiwick; no public agency can have the broad analytical capability to evaluate the market potential of a wide range of product concepts – that’s what VCs do, and if they could do it for the earliest stage companies they would be making more early stage investments; and no public agency can evaluate the capabilities of an untried and unproven management team – VCs know how to do that, and they do it by assuming that untried means not competent.

Second, I’d remember that MLSC is looking to leverage the funding it provides into economic growth – i.e. it needs to show a return on investment for the state economy. While a successful very early stage investment will have a higher rate of return than a later stage investment, that higher rate of return needs to be discounted by the markedly lower chances of success for the earliest stage investments. MLSC’s responsibility to the taxpayers demands that it do what it can to minimize its investment risk while remaining true to its mission. Avoiding the earliest and least predictable investment opportunities is one tool to accomplish this; partnering with private sector investors with proven track records for making good choices is another.

Third, there is something to be said for allowing natural selection to thin the enterprise herd before placing a financial bet. We want to support new enterprises lead by first-time entrepreneurs if their ideas are sound and they have the ability to execute. Trial by fire isn’t kind, or pretty, but it can be effective. An entrepreneur who has the commitment and competence to get his/her fledgling company far enough along to allow objective analysis of its chances for success, who is able to take the first critical steps into and across the funding valley of death, is actively demonstrating the most critical qualities required to gain private funding and take the company to the next stage.

I’m not advocating abandoning all efforts to support the earliest stage entrepreneurs. There are many things other than direct financial grants that can be done, and/or are already being done, to assist them. State initiatives like M2D2 at the University of Massachusetts (technical component at U. Mass. Lowell, clinical component at U. Mass. Worcester) and the Mass Technology Transfer Center (MTTC), multi-institutional cooperatives like CIMIT, university-based programs like MIT’s Venture Mentoring Service and Boston University’s Office of Technology Development, as well as private industry initiatives like MassMEDIC’s MedTech IGNITE program are part of an extraordinarily rich Massachusetts ecosystem of support for new enterprises in the life sciences.

Will Healthcare Reform Stifle Technology Innovation?

At CIMIT's Innovation Grand Rounds yesterday, an audience member posed an intriguing question (paraphraphed as follows): "Since almost all the real health technology innovation we see is generated in the U.S., will our move toward a more European-style, single-payer system destroy our ability to innovate?".

Let's ignore, for the moment, that the question greatly overstates domestic hegemony in the innovation department; even as we ought to be aware of centers of health technology innovation developing and growing elsewhere around the world, it remains true that the U.S. continues to produce a disproportionate share of new diagnostics, therapeutics and healthcare management technologies. And let's not get sidetracked by the observation that we are today no closer to a single-payer system than we ever have been (you need only refer to congressional resistance to a publicly administered health insurance plan that would compete with private plans), or the fact that most European health care systems are moving toward diversification of payers, not unification. A real question remains: Will the reforms currently in the works weaken the ability of U.S. life sciences companies to develop and commercialize innovative technologies?

The CIMIT panelists (moderator Michael Greeley of Flybridge Capital Partners, Dr. Marsha Moses of Predictive Biosciences and Children's Hospital Boston, Dr. Elazar Edelman of the Harvard - MIT Health Sciences and Technology Program and Harvard Medical School, Dr. Joe Smith of Johnson & Johnson's Corporate Office of Science and Technology, and Zen Chu of Accelerated Medical Ventures), all viscerally entrepreneurial, thought not. The consensus: We'll continue to innovate - it's cutural, part of our national DNA; but there will be a turn toward innovations that generate cost-savings rather than enhanced capabilities regardless of cost. One panelist even opined that he wished that Medicare would just come out and formally adopt cost-effectiveness standards so that we could unambiguously get on with the job. And no one even flinched at the heresy.

I don't think our desire or our ability to innovate in the life sciences are at risk from any reforms that are likely to receive serious consideration in the current administration - and certainly not fom any current proposals. And I agree that there is likely to be a turn toward innovations that can lower the cost of high quality care - Christensen's disruptive innovations. But I also think it would be foolish to believe that our innovation rate cannot be affected by our healthcare reimbursement system - most particularly, by the ability of that system to allow returns to life sciences capital investments commensurate with that available to investments in other sectors. The entrepreneurial spirit needs to be fed.

I'm also impressed by the disjunction between the CIMIT panel's easy acceptance of the possibility of formal cost-effectiveness standards and the continued industry doubts about relatively benign initiatives toward Comparative Effectiveness Research. The ECRI Institute provides a rich compendium of background materials on CER, including a comprehensive catalogue of trade association and professional society position papers, for those who might be interested in digging deeply into the subject. An April 14 Wall Street journal report is characteristic: "A $1.1 billion infusion for research that compares the effectiveness of differing treatments raises thorny issues on how that research might be used, including the possibility of denying patient access to treatment options, according to some members of Congress and drug and medical-device companies." This despite the fact that it is very clear from multiple sources that current law forbids such use of CER, that current legislative proposals are all designed to reinforce rather than undermine the prohibition, and that testimony from administration officials, including a letter to concerned Senators from DHHS Secretary-designate Sibelius as reported in the Pink Sheet Daily on April 13, is consistent: no intent or desire to use CER to make national coverage policy.

Comparative Effectiveness Research - The Emerging Opportunity

Industry's initial response to the health care system reform plans being talked about (a lot in public) and worked on (largely out of the public eye) in Washington has been, on the whole, cautious. No one really wants to defend the status quo, but there is widespread fear that whatever changes are made will have a negative effect on the commercial viability of life science companies. This should not be surprising - change is always threatening, and the threat seems greatest when, as is the case for health reform right now, the nature and extent of the change is uncertain.

Much of industry's current concern is focused, as I discussed in my last post, on the potential threats associated with increased funding for and utilization of Comparative Effectiveness Research (CER). It is easy to image CER being used to prevent market entry for some new technologies, or to stop payment or require market withdrawal for established products when new and better alternatives emerge. At the same time, the fundamental conceptual virtue of CER is so clear that it would be silly to flatly oppose conducting the research. Industry is reduced, because it is so focused on the potential threat of CER, to supporting the principle while opposing the use of CER findings by regulators and/or payers - i.e. trying to stuff the genie back into the bottle.

This is a losing strategy; CER studies are going to be conducted in increasing numbers, funded by private payers as well as government agencies. This would have been true independent of the Obama initiatives, but will certainly be accelerated by current reform efforts. The information CER studies generate is going to inform emerging clinical practice patterns and, ultimately, public and private insurer coverage policies. And there are substantial commercial opportunities to be exploited by companies that understand, embrace, and plan for the coming changes.

The most important thing to understand about CER is that it is a critical element in a larger ongoing systemic change - the move toward what is commonly referred to as Personalized Medicine (the right treatment for the right patient at the right time), and what Clayton Christensen has conceptualized as the evolution from "intuitive medicine" toward "precision medicine"(see The Innovator's Prescription: A Disruptive Solution for Health Care). Christensen's formulation is instructive because he provides a framework for identifying the opportunities that will be generated - indeed, required - by the health care system that will emerge, whether gradually on account of natural change processes or rapidly because of government-driven reforms, in the coming years.

I won't try to reconstruct Christensen's entire analytic schema; his book is too good, and his argument too subtle, for effective summarizing in this space. But I can point out a short list of the changes he sees as inevitable and the opportunities implied by those changes:

• The move toward precision medicine will be driven by the development of increasingly accurate and refined diagnostic technologies - diagnostics that allow assignment of a particular patient to a therapy that is virtually certain to be successful; these diagnostics will include genetic and molecular clinical laboratory tests, but also increasingly refined imaging technologies and other diagnostic tools. Overall, opportunities in the diagnostic sector will be greatly enhanced by the system changes that are coming.
• Realization of the promise of new and more discriminating diagnostic tools requires better and more comprehensive information exchange between and among institutions and practitioners; CER findings need to be incorporated into clinical decision support tools that can interface with individual electronic health records and that are accessible to practitioners but secure within the framework of loose organizations that Christensen refers to as "value networks". There is, therefore, an enormous emerging opportunity in health information technology (HIT).
• Implicit in the growing commitment to CER is an opportunity in clinical research management and evaluation. Recent years have seen the emergence of innovative clinical research data management and evaluation technologies or systems, typically as the proprietary solutions offered by contract research organizations. FDA's (tentative?) embrace of adaptive clinical trial designs is the leading edge of a broader class of innovative tools or extracting meaningful information from clinical experience. As examples, look at the value propositions offered by PharmaPros, Cytel, and others.
• For therapeutic technologies, the emerging opportunity is inextricably tied to embracing the CER paradigm - proactively identifying the patient subsets and/or circumstances for which the technology is most likely to be effective, accepting a smaller target market in order to achieve a higher efficacy rate. This dynamic is well understood by biopharmaceutical companies adapting to the business model implications of genetic "companion diagnostics"; broader CER initiatives will extend the dynamic more explicitly to device technologies. As a practical matter, this will frequently mean designing research studies that allow adequately powered comparison of outcomes across different clearly defined diagnostic subcategories. At the end of the day, companies that get out in front of the CER wave will prosper, and those that lag behind will not.

Comparative Effectiveness Research - Threat or Opportunity

The Obama administration is promising major health care reform, and this time … unlike all the times before since the creation of Medicare more than 40 years ago … the promises seem likely to be kept. We’ll see. What is most interesting to me is that of all the reform elements that have been proposed – broadened insurance coverage, mandatory electronic health records, a public insurance option to compete with private insurers, radiology benefits management, a defined approval path for biosimilars, a deepened commitment to so-called “personalized medicine”, etc. - the one causing the most anxiety to life science companies seems to be “comparative effectiveness research”.

The commitment to comparative effectiveness research (lets call it CER) has already been made. The February economic stimulus package contained $1.1 billion for CER. The 15 person council to set priorities and coordinate the commitment of that money was appointed March 18. And it is hard to argue that better knowledge about the relative merits of different medical therapies isn’t a good thing. So why is it that the formal CER policy statements of the key trade associations are so guardedly supportive, and the private communications of many industry heavies are clearly negative?

It is not as if we don’t already compare one therapy to another in clinical research all the time. Every controlled clinical trial involves such a comparison, and FDA increasingly wants to see active controls – best available therapy – rather than placebo controls. Insurers, too, in their coverage decisions, ask to see therapeutic outcomes as they compare to alternatives already covered. In the established processes for securing market entry and initial utilization, CER is already the coin of the realm.

The perceived threat is that the new CER initiative … which focuses on comparative outcomes in clinical practice (as opposed to clinical trials) … will extend the utilization of clinical research results in at least two ways:

1. To withdraw insurance coverage of an approved therapy when research indicates the relative superiority of another; and
2. To inject structural consideration of relative cost into the coverage process.

Both of these extensions envision more or less “global” CER findings: one therapy revealed to be superior to another as a general rule. Both would rightly be considered substantial threats by industry, and both would be strenuously opposed using well-defined and frankly shopworn arguments about the proper relative roles of physicians and payers (clinical choices ought to be the exclusive realm of the physician, medicine is an art not a science), and the proper utilization of cost-effectiveness data (none - you can’t put a price on human life).

But the fact is that worry about administrative restrictions on therapy choice by insurers and the injection of cost considerations into coverage decisions, and any momentum that either of those initiatives might in fact have (a lot for insurer restrictions on therapy choices, very little so far for cost as a critical element in limiting coverage) long predates the current vogue for CER. Those dynamics continue independent of the level of CER spending, or any formal commitment to a CER initiative.

The real import of the CER initiative is more subtle and far reaching than is reflected in industry’s conventional response – CER can be a critical enabler of the realization of the promise of personalized medicine: the right treatment for the right patient at the right time. I look to Clayton Christenson’s formulation in his challenging recent book The Innovator’s Prescription: A Disruptive Solution for Health Care (McGraw-Hill, 2009). Christenson charts the ongoing evolution of medicine from intuitive (decisions based upon the experience, special skills and intuition of highly-trained physicians) through empirical (decisions based upon validated statistical probabilities) toward precision (evidence-based determinations that are 100% accurate). The advent of precision medicine is largely enabled by genomics, proteomics and molecular diagnostics – variables and tools that are providing great insight into why some medicines work for some people and not others and how we can identify which medicine will work for a particular patient.

CER moves therapy selection – even absent genetic determinants - toward the precision medicine model. It isn’t the blunt instrument industry seems to imagine – obliterating established markets with large-scale studies. It is ultimately a highly refined tool, providing insight as to the circumstances under which one therapy is preferable to another: What are the characteristics of the patients helped by Option A? What were the circumstances under which they did best? And when and for whom was Option B better? It is, viewed this way, a piece of Christenson’s disruptive solution. Paired with reliable patient evaluation tools and diagnostics, CER can provide the knowledge to enable lesser-trained professionals to achieve better clinical outcomes at lower cost. Just what the doctor ordered … and an enormous opportunity for industry. I'll address the nature of that opportunity in a subsequent post.

Reimbursement analysis and planning can help build value for your life science startup

Capital is scarce in the current financial climate, and needs to be conserved. There is no money for a startup to spend on “like to haves” – it all need to be committed to “need to haves”. Early investment in reimbursement analysis and planning seems like a luxury under these circumstances. Besides, given the scarcity of VC money for new investments, you’ll likely be partnering with an established company that has in-house reimbursement expertise. And with the disappearance of the IPO as an exit strategy, you don’t plan to ever have to bring your technology all the way to the market – an acquirer will be doing that, and they’ll take care of reimbursement when the time comes, won’t they?

Perhaps that is true… if you’re really lucky … and if you’re willing to sell your interest at a discount. The thought process exemplified by the preceding paragraph is, in reality, a recipe for coming out on the short end of any deal – giving away a good piece of what you’ve worked long and hard to create. I would argue that a prudent investment in sound reimbursement analysis and planning is one of the very best and most important investments a young life science startup can make, irrespective of your financing and exit strategy. My argument can be summarized in three general points.

First, you need to remember the value, to either investors or acquirers, of risk mitigation. Removing uncertainty from an investment proposition – “taking risk out of the deal” – will always raise enterprise value. For an innovative medical technology, reimbursement uncertainty is a major risk factor. If you can provide a compelling analysis of the reimbursement status of your product, and a clear description of the resources and activities required to achieve optimal reimbursement, you will remove a major unknown from the investment analysis and thereby raise the value of your company to any investor or acquirer. And the cost of doing the necessary analysis and developing the roadmap to reimbursement is a small fraction of the amount required to address even relatively minor issues of technology risk. In terms of return, the money is better spent on reimbursement planning.

Second, you never want to enter any negotiation with less information about a critical deal element than the other party. Superior information translates directly into a negotiating advantage. If a potential investor or acquirer knows more than you do about the reimbursement issues relevant to your technology, you will be at a profound disadvantage in the discussion of valuation. If you have the information advantage, the negotiating leverage shifts to you. (That is why theoretical discussions of the efficiency of markets always include the assumption of equal information.) A full and complete understanding of the reimbursement status of your own technology is essential to assuring that you enter any negotiation in the strongest possible position, and – properly employed - will yield a significant return.

Third, the ability to demonstrate command of reimbursement issues relevant to your technology is an important element in establishing the credibility and excellence of your management team – and thereby helps to build an investor’s or acquirer’s confidence in the work the team has already done and its ability to continue to lead. You are asking people to make a substantial investment in the future success of work you have begun. Failure to understand and begin to address an issue widely recognized as critical to success is an error of omission that can only reflect poorly on a management teams overall performance.

I am not advocating the need to take on a heavy continuing reimbursement planning cost early in the technology development cycle. You want and need a level of resources committed to reimbursement that is appropriate to the progress you have made in defining your product and advancing your technology, as well as to the generality or specificity at which issues can be addressed. The investment can and should be measured and prudent – after all, capital is scarce and needs to be conserved. If you spend your money wisely, however, some of it will be spent on assuring that you understand the reimbursement issues raised by your technology and on developing a plan to address them.