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Research Brief
Doctor standing in front of abstract computer screen with icons

Brian Jackson/Fotolia

Doctor giving a baby a vaccination shot

Sergey Khamidulin/Fotolia

The Centers for Disease Control and Prevention designated vaccines universally recommended for children, including the Haemophilus influenzae Type b (Hib) vaccine, as one of the country's ten great public health achievements of the 20th century.

No matter how it’s tallied—in total, per capita, or as a percentage of gross domestic product—U.S. spending on health care outstrips that of any other nation. Many experts identify costly new technology as the biggest driver of health care spending. Previous studies aimed at reining in spending on technology have focused on changing how existing medical technologies are used. But what about also encouraging the creation of technologies that could improve health and reduce spending, or that provide large-enough health benefits to warrant any extra spending? A recent RAND study focused on policies that could help change which medical products—drugs, devices, and health information technologies—get invented in the first place.

To spur inventors to create medical products that lower health care spending and promote health, policymakers need to address the perverse financial incentives that lead inventors and investors in the opposite direction. Currently, large profits are most often available from creating increasingly expensive products that boost spending, whether or not they also substantially improve health. In contrast, inventors face relatively weak incentives to create products that would help decrease spending.

The RAND research team developed ten high-priority policy options that could change the costs, rewards, and risks that inventors and investors face. We synthesized information from scientific, trade, and popular literature; conducted interviews with more than 50 national experts from a variety of fields; sought input from a panel of accomplished technical advisors; and developed illustrative case studies of eight medical products.

Who are the key players along the medical product innovation pathway?

In its simplest form, the innovation pathway for medical products has three stages—invention, regulatory approval, and adoption. Figure 1 shows key actors at each stage—the individuals and entities that make the most important decisions—as well as individuals and entities that seek to influence them. For example, inventors and investors obviously play key roles in the invention stage. The U.S. Food and Drug Administration (FDA) is the dominant player in the approval stage, and the physicians and hospitals deciding which technologies to use for which patients largely determine how quickly and broadly a product is adopted, thus determining a product’s success in the U.S. market.

Inventors and investors are strongly influenced by their expectations about the prospects and costs of gaining regulatory approval and the eventual adoption and use of their products. In turn, these expectations determine the anticipated costs, risks, and market rewards of pursuing their ideas for creating new medical products.

The decisions of key actors are influenced by others—for example, the National Institutes of Health (NIH), as the nation’s principal funder of basic biomedical research, provides fuel for invention by virtue of its investments in creating basic scientific knowledge. Manufacturers, patients, and payers all try to influence a product’s use for different reasons and with varying degrees of success.

Key actors
  • Inventors
  • Investors
  • FDA
  • Physicians
  • Hospitals
Invention leads to Approvals leads to Adoption
Key Influences
  • NIH
  • ONC
  • Manufacturers
  • Politicians
  • Manufacturers
  • Patients
  • Payers

Fig. 1 The Medical Product Innovation Pathway

NOTE: ONC=Office of the National Coordinator for Health Information Technology.

What drives the costs, risks, and rewards of medical product invention?

The decisions of inventors and investors are largely driven by two considerations. The first is a technical assessment of whether the new product can be successfully brought to market and, if so, how much money and time it will take. The probability of success is influenced by perceptions of risks: scientific risk (will the technology work?) and regulatory risk (will the FDA approve it for use?).

The second consideration is financial: Are the anticipated rewards of bringing the product to market big enough to justify the associated costs and risks at all three stages?

We identified five features of the U.S. health care environment that substantially affect the costs, risks, and rewards of medical product invention for inventors and investors. The five are set forth below; to amplify the descriptions, we include paraphrases of comments from our expert interviews. The policy options that we developed were designed to address these features.

Roadblocks to High-Value Medical Product Innovation

Lack of Basic Scientific Knowledge From the Experts
Knowledge gaps increase the risk of failure, the likely costs, and the time required to bring to market products that could help decrease spending. When making decisions about where to invest R&D resources, developers consider the state of the basic science.
Costs and Risks of FDA Approval
The FDA approval process takes time and money; until FDA approval is granted, inventors and investors may receive no returns from the U.S. market to help recoup their investments. The biggest impediment to high-value innovation—one that pushed developers to go in safer directions—is the difficult regulatory pathway.
Inadequate Rewards for Medical Products That Decrease Spending
Innovators who develop products that could reduce spending often cannot expect adequate market rewards for their efforts. Reasons include the facts that insured consumers do not pay the full price once they have exceeded their deductibles; many patients assume that newer, more expensive products must be better; and providers making decisions to use—or not use—a particular product often reap larger financial rewards from using a costlier alternative. The reason that developers are deterred or discouraged from creating high-value technology that lowers overall spending revolves around reimbursement… There’s no market incentive.
Treatment Creep
Medical technologies that provide substantial health benefits to particular kinds of patients are often used for other kinds of patients, including many for whom there are small, or no, health benefits. Companies will sometimes focus on one population to get over regulatory hurdles and then shift the focus for longer-term marketing.
Medical Arms Race
Health care providers such as hospitals often compete for business by offering the latest high-tech equipment or service rather than by offering greater value through larger health benefits and/or lower prices. Marketing robotic surgery to hospitals for use in prostate surgery was “genius,” but there was no evidence that using the robot improved health outcomes.

In short, the medical innovation system is broken.

Robotic assistance with laproscopic surgery

Nader Moussa/Wikimedia Commons/CC-BY-SA-3.0/GFDL

About 80 percent of all radical prostatectomies in the United States today are performed with robotic assistance, but there is no good evidence that robotically assisted radical prostatectomies produce better outcomes or have fewer serious side effects than manual radical prostatectomies.

Phial in front of a nurse in hospital room

WavebreakMediaMicro/Fotolia

The FDA approved the use of Avastin for metastatic breast cancer patients, but later withdrew that approval. Nonetheless, by law, Medicare continues to pay for Avastin used for those patients because this use is listed in major drug compendia.

Doctor holding a tablet

rustle_69/Fotolia

A major limitation of today’s electronic health records is the lack of interoperability between systems.

Apple and pills

Eldin Muratovic/Fotolia

A cardiovascular polypill, a multidrug combination that reduces blood pressure and cholesterol, could offer substantial health benefits per dollar spent, but development is slowed because inventors cannot justify the cost required to seek regulatory approval.

How can we redirect invention of medical products?

Our analysis led us to ten high-priority policy options that could alter the financial incentives driving medical-product innovation. Some options would directly affect inventor and investor decisions by lowering invention or approval costs and risks. Other options would indirectly influence inventor and investor incentives by altering the expected market rewards of an invention. Figure 1 highlights the stage of the innovation pathway at which each option operates. Policy options are described briefly on the pages that follow.

These options, individually or in combination, could redirect inventive efforts toward products that would help reduce health care spending and/or ensure that new products will provide health benefits that warrant any spending increases.

Ten Policy Options for Healing Medical Product Innovation

  1. Enable More Creativity in Funding Basic Science

    NIH’s method for selecting which research to fund typically favors low-risk projects; if investigators fail to achieve their project goals, prospects for future NIH funding are greatly reduced. A different model is used by the Howard Hughes Medical Institute. It funds scientists rather than projects, encourages risk-taking, and seems more willing than NIH is to continue funding promising scientists whose past risky endeavors did not pan out.

  2. Offer Prizes for Inventions

    Substantial prizes could be awarded to the first individual or group that invents a drug or device that satisfies pre-specified criteria. Prizes could be offered by public entities such as the Centers for Medicare & Medicaid Services (CMS) or NIH, by private health care systems, by philanthropists or charitable foundations, or by public-private partnerships. An alternative to an immediate cash prize is to offer a percentage of future savings to the Medicare program attributed to the invention.

  3. Buy Out Patents

    Purchasing the patents of products that have already been invented could ensure that a product is commercialized at a lower price, increasing the immediate reward for inventing products that decrease spending. Public agencies, private philanthropists, or public-private partnerships might be purchasers. A purchaser could put the patent in the public domain, generating price competition, or license the technology selectively, specifying the highest price that licensees could charge. The best approach might be to offer patent sellers a share of the savings to the Medicare program attributed to the invention.

  4. Establish a Public-Interest Investment Fund

    Private investors often find the likely market rewards for inventing products that reduce spending too low to be attractive. When this is the case, a public-interest investment fund could provide the required investment capital. A private-public partnership could tap the expertise of private-sector investors who are most capable of assessing the promise of technical concepts and inventors. They could be motivated to participate by being allowed to invest in projects supported by the fund, with their financial returns coming from a share of Medicare savings attributed to the inventions.

  5. Expedite FDA Reviews and Approvals for Technologies That Decrease Spending

    The FDA could offer expedited—but not watered-down—review and approval processes for medical products with clear potential to substantially reduce health care spending. Creating such mechanisms could lower inventors’ regulatory costs and speed entry to market.

  6. Reform Medicare Payment Policies

    Currently, CMS is not allowed to consider cost in determining payment rates—if it were, the agency could set Medicare rates to save money in the short run and improve inventors’ incentives over the long run. One widely discussed possibility is for Medicare to move more swiftly to adopt approaches—such as bundled and capitated payment arrangements—that put providers at financial risk for costs not required to deliver high-quality care. Expanding the numbers of providers facing and circumstances involving such risks should boost demand for cost-saving drugs, devices, and other health care technologies.

  7. Reform Medicare Coverage Policies

    CMS could change its coverage determination policies in ways that would increase the health benefits per dollar of Medicare spending. For example, CMS could expand use of its existing “coverage with evidence” process. Medicare could also stop paying for tests, procedures, and products that clinical experts have deemed inappropriate or ineffective; many of these have already been identified by the American Board of Internal Medicine Foundation’s Choosing Wisely initiative. Medicare could also stop covering off-label use of some very expensive cancer and other specialty drugs in circumstances for which there is little or no evidence of effectiveness. Some of these policy changes would require new legislation.

  8. Coordinate FDA and CMS Processes

    For products that are likely to help reduce spending, CMS coverage and payment determination processes could be coordinated with FDA review and approval processes. Coordination could reduce the time required to obtain revenues from the Medicare market. Identifying the best approach might be informed by what is learned from current efforts involving parallel review by FDA and CMS.

  9. Increase Demand for Technologies That Decrease Spending

    Changing payer, provider, and patient incentives could increase demand for products that decrease spending. One promising approach is expanding use of value-based insurance designs (VBIDs), which require individual patients to pay more out of pocket to receive services that are less likely to benefit them. A major challenge in implementing VBIDs is determining which services are more and less likely to substantially benefit individual patients.

  10. Produce More and More Timely Technology Assessments

    Health technology assessments (HTAs) provide systematic evidence about the safety, efficacy, effectiveness, and cost of drugs, devices, and procedures. Because medical technology evolves quickly, HTAs are more useful when they are more current. An emerging commercial model may suggest a good way to produce more timely HTAs—namely, by keeping abreast of the literature through fairly frequent literature searches and revising HTAs when new findings warrant.

Several of these options are novel; thus, there are few precedents or existing analyses to help policymakers design and successfully implement them. Others have already been proposed but not implemented. In our view, the potential benefits of implementing specific policies could dwarf the costs of doing so. For example, the potential savings to the Medicare program alone that could result from implementing several of the options would generate a large pool of money that could be used to spur invention of products that reduce spending or provide substantial health benefits.

Because the stakes in reining in health care spending are so high, and the need to get more health benefits from the money we spend is so great, we believe all of these options should be considered—the sooner the better.

Technical Advisers

To help us achieve our project goals, we convened a panel of national experts to review our ideas and weigh the promise of various policy options suggested by our findings. The panel offered comments on our draft analytical framework, weighed the pros and cons of different case study topics, and suggested several policy options. However, the panel members do not necessarily endorse the study findings.

Donald M. Berwick, MD
President Emeritus and Senior Fellow, Institute for Healthcare Improvement, Cambridge, Massachusetts
Otis W. Brawley, MD, FACP
Emory University and American Cancer Society
Philippe Chambon, MD, PhD
Managing Director, New Leaf Venture Partners LLC
Delos M. Cosgrove, MD
CEO and President, Cleveland Clinic
Ezekiel J. Emanuel, MD, PhD
Vice Provost for Global Initiatives; Diane v.S. Levy and Robert M. Levy University Professor; Chair, Department of Medical Ethics and Health Policy, University of Pennsylvania
Atul Gawande, MD, MPH
Surgeon, Brigham and Women’s Hospital; Director, Ariadne Labs; Professor, Harvard School of Public Health and Harvard Medical School
Brent C. James, MD, MStat
Chief Quality Officer, Intermountain Healthcare
Dean Kamen
Founder and President of DEKA Research & Development Corporation
Karen Katen
Senior Advisor, Essex Woodlands
Larry Kessler, ScD
Professor and Chair, Department of Health Services, School of Public Health, University of Washington
Vinod Khosla
Partner, Khosla Ventures
Kenneth W. Kizer, MD, MPH
Distinguished Professor, University of California (UC) Davis School of Medicine and Betty Irene Moore School of Nursing; Director, Institute for Population Health Improvement, UC Davis Health System
Robert Langer, PhD
David H. Koch Institute Professor, Massachusetts Institute of Technology
Mark McClellan, MD, PhD
Senior Fellow and Director, Initiative on Value and Innovation in Health Care, The Brookings Institution
Arnold Milstein, MD
Professor of Medicine, Clinical Excellence Research Center Director, Stanford University
Trevor Mundel, MD, PhD
President, Global Health, Bill & Melinda Gates Foundation
Peter J. Neumann, ScD
Director, Center for the Evaluation of Value and Risk in Health, Institute for Clinical Research and Health Policy Studies, Tufts Medical Center; Professor, Tufts University School of Medicine
Boris Nikolic, MD
Chief Advisor for Science and Technology to Bill Gates
Michael A. Peterson
President and Chief Operating Officer, Peter G. Peterson Foundation
Michael E. Porter
Professor, Harvard Business School

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