Healthcare Venture Capital

De-escalating the Medical Arms Race: Why Lower Tech Is the Future of Medicine

In healthcare on August 10, 2010 at 6:14 pm

This post will offend some of my biotech and medtech friends. Sorry.

I firmly believe that we are in the final chapters of “The Great Medical Arms Race.”  And unlike the Cold War, I don’t think the United States will be the winner of this arms race. We might feel like we are winning, but in fact, we will end up losing due to the perfect storm of three unsustainable realities: healthcare cost growth, a federal budget crisis, and demographics.

Some of the advances we have made in life expectancy and quality of life due to some of these new technologies is amazing.  The US healthcare system has been very good at developing innovative new technologies that improve outcomes and increase costs.  Unfortunately, we are also very good at approving new technologies that just increase costs but have little or no effect on medical outcomes.

Lots of people have written about the the vast amounts that Medicare spends on end of life care. In particular, as a society, we spend too much on technology in the last few months of life and too little on basic access to primary care.  We spend too much building new heart hospitals and spine surgery centers and too little on hospice care or access to preventive care.  In short, we don’t “let go” well as Atul Gawande wrote so eloquently last week in the New Yorker.

I think everyone can agree that despite having the most access to technologically advanced therapies, the US taxpayer is not getting any bang for the buck.  A recent study showed that there is little correlation between reduced mortality and increased spending on several major health conditions.

Despite spending 17% of GDP on healthcare, the outcomes are dismal.  According to the WHO, amongst developed nations, the US is

-37th in overall health

-34th in life expectancy

-28th in infant mortality

-30th in obesity

In the world of medical technology, one of my favorite examples of questionable bang for the buck is colonoscopy.

-There are 4 million colonoscopies per year in the US.  Many adults who need colonoscopies still don’t get them due to fear of the procedure, lack of access to care, etc.

-Yet despite that, there is a growing $1b/yr medical device market for colonoscopes and related equipment in the US alone

-Colonoscopy is the bread-and-butter income for most of the 12,000 GI docs in the US and has aided greatly in the proliferation of GI focused ambulatory surgery centers that doctors often own a financial interest in.

-However, there exists little long term cost-effectiveness data showing that screening average asymptomatic risk populations with colonoscopy every 3 to 5 years is actually cost-effective in the long-run.

-In fact, more and more data shows that colonoscopy is being done way too often on average risk patients. High risk patients should of course be screened with colonoscopy.

-Health Affairs recently published an elegant paper postulating that lower-tech and lower cost screenings (ie, FOBT) for colonoscopy would “would result in more individuals’ getting screened, with more life-years gained”

So how about this crazy idea?

What if an lower-tech therapy or diagnostic had 80% of the effectiveness of a new technology but at 20% of the cost of the new technology?  Would society favor the older technology or the newer one? Would patients and families accept that they aren’t getting the absolute latest and greatest?

A totally rational society should choose the older technology and then invest the dollars saved into other areas with higher societal needs (ie, education) and potential benefits. But I fear that without some financial incentive, most individuals would not choose the cheaper technology if given a choice.

My favorite recent paper on this topic reviewed almost 1000 cost-effectiveness studies and concluded that only 0.4% of the interventions in those papers actually reduced cost significantly while only decreasing quality a small amount.

The authors of that study also concluded that “less-expensive, lower-quality innovations are ubiquitous in other economic sectors but have not been described in health care.”

This should frustrate every one of us as consumers of healthcare.  It certainly frustrates me as a investor in healthcare technology companies.

I think cost-effectiveness studies should be mandatory for US approval of new medical technologies.  If you pitch me a new medical technology company, be prepared to answer what your cost-effectiveness streategy is.

Cost-effectiveness is clearly the holy grail and where healthcare is headed in this country given the two big trends of the next 25 years: massive federal and state budget constraints and inevitable demographics.

Getting this issue right is the only fighting shot the US has at not having rising healthcare costs cripple the economy.  I’m really hoping the new government funded Patient Centered Outcomes Research Institute does the right thing here as well.

So, taking off my policy wonk hat and back to venture capital for a second: where is the investment theme here? Better decision support tools for doctors? Generic drugs or “generic” medical devices? Cost transparency services like Castlight?

If you can think of others, please comment below.

  1. I personally don’t think our society will willingly accept anything other than “the best” in healthcare. We never have, so it’s hard to see why we ever would. And people don’t want to pay for it, either. We are an entitlement society. People bitch about a $25 co-pay when their employers are paying $20,000-30,000/year for their insurance. Rationing is the only solution, and that’s hard to see here, too (except for the Death Panels!). I’m just beginning to get my bills for my appendectomy a couple of weeks ago – $13,000 for 2 nights in the hospital, and that doesn’t include the costs for the CT, radiologist, surgeon, anesthesiologist. Conclusion? We are totally screwed. Result? Ultimately, we will all be treated at the VA (or equivalent) within 20 years. 🙂

    • Steve – you are right. The divorcing of actual costs to patients from treatments rendered makes healthcare unique. And we are an entitlement society – Americans want it all right now.

      Uwe Reinhardt was my favorite professor ever and wrote a much better version of my blog post last month:

      To quote Uwe:
      “It is remarkable that for all the lip service it pays to the need for cost control in American health care, Congress still expressly forbids considerations of “costs” in the “comparative clinical effectiveness analysis” called for in the recent health care bill.

      In other words, Congress has declared the “total treatment cost” dimension of the matrix above as forbidden territory, lest it stand accused of establishing death panels.”

  2. Great post! I think the key is increasing advance care planning to improving the frequency of patient-centered decisions that will both improve the quality of care and reduce costs.

  3. If we all ended up getting our care at the VA, we’d be a lot better off than we are now. Despite serving a much poorer and sicker group of patients than the mainstream healthcare marketplace, the VA delivers significantly higher quality on all available metrics at markedly lower costs. Docs and staff are salaried so the fee for service “original sin” of American medicine plays no role. The VA can shift resources into the home- the right care at the right time in the right place- and away from the costly and harmful environments of hospitals and nursing homes- patients want to be home, quality is better, survival is better, and costs are dramatically lower. Why don’t we make this care universally available in the U.S.? A lot of people’s profit would go away and they lobby very effectively.

    • Very good comment, Diane.

      I think that for us to even consider the holy grail of Universal Care, everyone in the medical system would have to agree to make less money.

      That would mean lower salaries for docs, lower revenues for hospitals and insurers, shrinking margins for manufacturers of drugs and devices. No one is raising their hands to make less money. And given the influence of lobbyists in healthcare, I am sad to say that the chances of that happening (short of a 9/11 type fiscal crisis driven by healthcare costs in the year 2025) are 0.0%

      There are more doctors per capita in many EU countries than there are in the US. Yet, everyone just makes less money at every step of the way.

  4. Bijan,

    Great post! It’s definitely an interesting time for medical technology – somewhat of an inflection point. The “arms race” mentality is starting to give way to the “value” mentality. Some trade-offs are still taboo, especially in the US system, and there is a general sense of entitlement among the population. From a policy perspective I believe that gradual cost pressure will continue and slightly intensify. There may even be changes in social expectations to change how end of life situations are managed especially if more costs are visible to patients than today. However I don’t think the doom and gloom scenario of extreme cost cutting and stagnation of technology will come to play. Even if spending in healthcare increases over time, it’s because we are growing older as a society and it’s a necessary burden that societies will have to learn to cope with, maybe by cutting other spending (what if we found a way to halve military spending or energy spending – both more likely than cutting healthcare spending).

    The investment thesis is in technologies that improve outcomes or costs or both but the old way of adding more bells and whistles to products and increasing costs and pricing will not stand. The growing global markets (especially the BRIC countries) will also serve to lower costs (kind of like what happens with consumer electronics) and there will clearly be a market for mid-performance technologies much more than before – especially in the less critical applications. Companies that can identify these spaces will be able to capitalize on the opportunity. Look for some of these companies and technologies to come from the BRIC countries.

    I don’t really think you’ll see “generic” devices because unlike drugs where most of the expense is in proving the molecule (or gene etc.) works, in devices a lot of the expense is in the engineering work done to develop the device, and reverse engineering it does not offer an advantage comparable to reverse engineering a molecule. Also, unlike drugs, most devices enter the market with many years left on their patents, and the rate of technology change is faster so by the time something is off patent it’s usefulness is limited.

    Finally, I think there’s a huge opportunity of reducing waste in the healthcare system including excessive defensive medicine – maybe someday soon we’ll figure out tort reform!

  5. Hey Bijan, you know I agree with you. I am amazed how many medical device executives come pitch me deals and not only can’t answer the question “how does your device save money for the healthcare system” but haven’t even contemplated it. Surely that will begin to change, but the smart ones are already thinking about it. There is simply no place for more expensive but equivalent (or worse) products in today’s healthcare environment.

  6. Bijan,
    I would even further than Lisa Suennen: “How does your device save direct costs for the healthcare system?” Many devices promise the savings of future costs (e.g. preventing future events) but the savings is never seen. Providers are justifiably skeptical, unless you can demonstrate savings in direct provider spending.
    So, two themes to consider:
    1. devices that enable provision of care at a lower-cost site, such as moving an inpatient procedure to an outpatient setting or to an office-based procedure.
    2. devices that reduce hospital length-of-stay, possibly by substituting remote/home monitoring for in-patient monitoring.
    By the way, new devices don’t need to be low-tech to be low-cost. In particular, advances in electronics and telecommunications should enable the development of low-cost, high-tech devices that both lower costs and improve patient care.

  7. The FDA seems to agree with you since they have virtually stopped approving new technologies. This will certainly slow down the arms race.

    Three simple but draconian solutions:
    1) Put all doctors on salary and elimiate fee for service
    2) Organize doctors and instritions into ACOs and institute bonuses and penalties for majo variations in outcomes
    3) Remove all government subsidies on the corn and corn oil industry

  8. Great post and good comments.

    Bijan and Suennen,

    First off, I realize that we are using ‘cost’ as a useful metric due to the impending doom of the healthcare system. But shouldn’t we be using ‘value’, loosely defined as benefit / cost, as the true metric. In this way, we are not searching for a low-tech solution, but a better higher value solution to solve the problem. For instance, assuming we have a diagnostic that is better than a colonoscopy (say a serum based biomarker signature for futuristic sake). In this case, assume better means that the test enables earlier detection as well as higher compliance. If the tests were priced similarly as the colonoscopy this will drive the prices of the diagnostics up, but potentially may drive the overall costs of treatment down (higher diagnostic compliance and earlier detection equals higher cure rate).

    Putting this in the light of an investment thesis is challenging. I suppose this scenario may lower the costs of the overall healthcare system, however potentially not for any given healthcare provider. Additionally, if the reimbursement stars don’t align the physicians on the ground may have no financial incentive to lead to customer adoption. In the end, this may end up actually being a very challenging investment.

    Unlike most other industries where if a product adds value to the end user the user it is often quickly adopted. Unfortunately in healthcare it seems that the incentives of the end user (patient) and customer (healthcare providers) are not well enough aligned.

  9. […] recruitment, technology build-up (a build-up that he referred appropriately to as the “medical arms race“), and more movement toward outpatient care, it is very clear that New York City’s […]

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