Thinking about Life Sciences: ‘Medicare Part D’: What the Benefit Means... http://blog.aesisgroup.com//2006/05/15/medicare-part-d-what-the-benefi...

Thinking about Life Sciences

http://blog.aesisgroup.com

Tuesday, May 16, 2006

‘Medicare Part D’: What the Benefit Means For Medical Technology

Today is May 15 and the deadline is upon us for Medicare beneficiaries to sign up for the new prescription
drug benefit (or Medicare Part D).
Traditional Medicare: Balance of Power between Hospitals and Physicians
Whether or not you’re a senior citizen, it hasn’t been hard to notice the barrage of news and advertisements
about this much-touted and equally much-maligned program. I’ll leave it to others to debate this point.
Instead, this column will highlight some of the implications of this new legislation for health-care
financing in general and medical technology reimbursement in particular.
Medicare was enacted more than 40 years ago, and at that time and up until recently, it was structured in
two parts: “Part A” and “Part B”. Payments to hospitals (and other health-care institutions) were made
through “Part A” while payments to doctors were made through “Part B”.
For example, if you had the misfortune of requiring a hospital stay, the technical and inpatient bed fees of
that stay were paid through “Part A” while the various professional fees for the doctors who oversaw or
consulted on your care were paid through “Part B”. This arrangement defined the landscape of health-care
reimbursement for more than 40 years as it delineated an indirect competition between hospital
reimbursement and physician reimbursement.
While the direct source of Medicare funding for each of these components was not exactly the same (e.g.
general tax revenues vs. a specific Medicare tax), there was one “Medicare pie” at a high level with
hospitals and doctors vying for their portion of that pie.
Over the years, the balance of power would ebb and flow among the two groups – and certainly there were
local and regional variations in the relative power between them – but largely physicians and hospitals
worked together. Despite the clear need for collaboration between doctors and hospitals with respect to
patient care, there has been an element of competition between the two constituencies when it comes to
financial reimbursement.
When Medicare reimbursements are relatively high and growing, everyone is largely happy. However,
during the mid-1990s, there were significant stresses to this balance as a result of the general growth of
HMOs and managed care as well as the Balanced Budget Act (BBA). The latter dramatically cut back
Medicare reimbursements through the last part of the 1990s, which resulted in an accelerated trend of
physician practice buyouts and hospital consolidations.
A new player: the pharmaceutical industry
Now that pharmaceutical companies have a stake in the Medicare pie, the competitive reimbursement
landscape is very different. Instead of doctors and hospitals competing for a relatively fixed and
sometimes decreasing pool of funds, we now have a three-way race between doctors, hospitals and the
pharmaceutical companies. As a result, alliances among the three groups will shift:
1. Doctors and Hospitals
The relationship between these two parties will become closer as both work to preserve their

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Thinking about Life Sciences: ‘Medicare Part D’: What the Benefit Means... http://blog.aesisgroup.com//2006/05/15/medicare-part-d-what-the-benefi...

collective stake. We see this in the increase in physician-hospital joint ventures for surgery
centers, ambulatory centers and the like.
2. Doctors and Pharma
The relationship between pharma and physicians has traditionally been very close. Sales
detailing – with strategies such as providing free samples and paying for conferences and
dinners – has been an important part of the doctor-pharma relationship.
The backlash against such marketing tactics has put a wedge between doctors and Big Pharma.
This will be further widened by the competitive situation raised by the new three-way Medicare
reimbursement structure.
Implications for Medical Technology / Medical Device Companies
What does this mean for medical technology and device companies? Are they left out of the Medicare pie?
Will this negatively impact reimbursements for medical devices as funding goes to physicians, hospitals
and pharma?
While it is difficult to say now, one thing is for sure: given the budget deficit and continued geopolitical
pressures, Medicare reimbursements will be increasingly tight. The situation will be similar to the BBA in
the late 1990s (though there may not necessarily be explicit legislation along those lines). Competition
among physicians, hospitals and pharma can only increase. In turn, the medical technology industry will be
impacted by “Medicare Part D” less in terms of any direct regulatory or legislative effect but rather by
how the device companies play into this changing competitive landscape.
Safety, efficacy and cost are major criteria for the adoption of a medical technology. However, the effect of
this device on the competitive landscape will also play an increasing role in its adoption. For example, a
device that minimizes or eliminates drug costs has an increased chance of being accepted. The polymer
injection and radio frequency ablation techniques for gastro-esophageal reflux disease (GERD) exemplify this.
In this case, the very effective and safe proton-pump inhibitor (PPI) drugs (such as omeprazole) actually have
a viable alternative in the form of minimally invasive, device-mediated interventional therapies.
While the PPIs are remarkably effective, patients typically need to be on them for long periods of time
with aggregate drug costs that can exceed $1,000 per year. In that context, a $3,000 procedure (which can
more definitively solve the problem) is not out of the question. As implantation techniques for devices get
even more minimally invasive and as drug costs continue to increase, we are likely to see more of these
sorts of therapeutic interventions. As more money flows into pharmaceutical drug benefits, one can argue
that spending and costs for drugs can only increase.
One of the most controversial items in the Medicare Modernization Act is the prohibition on government-
negotiated pricing with the drug companies. While on the surface this may appear to be quite a boon for
the pharmaceutical industry, the increased costs that will inevitably result will give even stronger impetus
to other technologies and approaches to therapy. In this way, “Medicare Part D” may actually serve as a
stimulus to the medical technology industry as the many stakeholders in the health-care system try to work
out what is best and most efficient for patients and society. We shall see. In the long run, I believe there
will be yet another financing model for medical technology. I will make that proposal and prediction in a
later column.
Ogan Gurel, MD MPhil
gurel@aesisgroup.com
http://blog.aesisgroup.com/

Health policy medicare practice of medicine gastroesophageal reflux disease Aesis Research Group Ogan Gurel MD

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