Lawton Burns is a professor of health care systems and management, director of the Wharton Center for Health Management and Economics, and author of a new book entitled, The Business of Healthcare Innovation. While much has been written about doctors and hospitals, government regulations and medical insurance issues, Burns’ book looks at an area of healthcare that has not gotten much attention — the producers of healthcare products, ranging from pharmaceuticals and biotechnology to medical devices and information technology. Yet Burns would argue that a focus on the producer side of the healthcare equation is critical — not just because we are increasingly more reliant on medical technology, but also because of the ever escalating costs of advances in these areas. Burns talked to Knowledge at Wharton’s Mukul Pandya and Robbie Shell about the issues raised in his new book.
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Lawton Burns Podcast Transcript: The Business of Health Care Innovation
Lawton Burns is a professor of healthcare systems and management, director of the Wharton Center for Health Management and Economics, and author of a new book entitled The Business of Healthcare Innovation. While much has been written about doctors and hospitals, government regulations and medical insurance issues, Burns’s book looks at an area of healthcare that has not gotten much attention; the producers of healthcare products, ranging from pharmaceuticals and biotechnology to medical devices and information technology. Yet Burns would argue that focus on the producer’s side of the healthcare equation is critical, not just because we are increasingly more reliant on medical technology, but also because of the ever-escalating costs of advances in these areas. Professor Burns talked to Knowledge at Wharton’s Mukul Pandya and Robbie Shell, about these issues.
Knowledge at Wharton: In your book, you note that the costs of innovation have been rising steadily for decades, and that the willingness of society to fund these new developments is under tremendous strain. What’s an example of a particularly costly innovation, and is there a time when you think both the producers and the users of medical technology will simply stop funding new drugs and medical procedures, or will at least use stricter criteria for deciding what to support and what not to support?
Lawton Burns: An obvious example right now are called ICDs, implantable cardiac defibrillators, things that jumpstart the heart. These devices cost $25,000 apiece. And what’s interesting is that, over the last few years, the Medicare program which pays for the elderly’s health insurance in the United States, has broadened the criteria of patients who can get these devices implanted in them, and the government pays for them. So the government is actually expanding the volume of a device that’s $25,000 apiece, instead if you multiply the volume times the price, you can see one reason for escalating healthcare costs. It’s just that the government thinks this device ought to be implanted in more and more people.
I think the, I don’t think there will come a time in the foreseeable future when either the producers or the payers in our healthcare system put a stop to all this. And that’s because, the way our healthcare system works in the United States is, on the one hand you have the people who pay for healthcare, and they put money into the system through reimbursement, through fiscal intermediaries who handle reimbursement insurance coverage, and that money flows into the provider’s hands, and then eventually into the supplier’s hands, the people who make these products. On the other hand, you have the producers of these products, who have a relentless stream of innovation that’s flowing towards the providers, and the way our government has decided to figure out how much technology we can afford, is they give the providers a certain amount of money, and then with that certain amount of money they have to manage the demand for an incredibly unrelenting supply of new technology, and it’s up the providers to figure out how to do the rationing. So the providers have to choose between, well, do I want this technology or that technology, what do my patients want, what do I want to use, what’s at the scientific forefront of the field? So it’s a very decentralized rationing process. In the big picture, the reason why we have so much new technology in the United States is that we can afford it. As long as our national income keeps rising, we’ll keep spending it on this technology.
Knowledge at Wharton: That leads to a very interesting question. Is there a way of thinking about what technology is worth paying for and what isn’t? What’s a justified innovation, in your view?
Lawton Burns: That’s a great question. In the United States, we used to have an Office of Technology Assessment in the federal government. That office no longer exists, and now the way technology is assessed, technology assessment now takes place at a local level, and it takes place in one of two areas. Either the insurance companies do it, or what I think is going to increasingly have to happen is, the providers are going to have to do it. Maybe both sides are going to have to do it. But right now it’s a very decentralized, fragmented process. Medicare only does, only national coverage for about 50 or so technologies. Everything else is left up to the local insurance carriers around the United States. So here, again, it’s a decentralized process, there are no standards, and to be honest, I don’t we have a very sophisticated technology assessment system, with the exception of the FDA, and the testing and approval of new drugs. Now, that’s a pretty rigorous process. But once you get past the drugs and the biologicals which the FDA also approves, the testing of technology isn’t quite as rigorous. The testing of new devices is basically, make sure they don’t kill people. We’re not testing new devices like the way we test new drugs, and information technology isn’t tested at all.
Knowledge at Wharton: What role specifically to consumers play in the escalating costs of healthcare in the sense that they always demand the latest new treatments. Are we as a society conditioned to always expect the best for ourselves no matter what the cost? What are the tradeoffs here?
Lawton Burns: I think consumers in the United States are spoiled. We want the latest, we have the insurance coverage and we expect the insurance coverage to pay for it, and we want it right away. If you look at the diffusion of new technologies from country to country, the thing that really separates the United States from everywhere else is that more people get access to new technology faster in the United States. They don’t have to wait very long. They don’t have to get in queues. There’s very little formal or top-down rationing done by the healthcare system. It’s all, you go into your doctor, your doctor orders it, the best available, the schedule permits, you get the procedure, you get the device, you get the drug. Other countries, they ration that explicitly. But not in the United States.
Knowledge at Wharton: Are there any examples of technologies that consumers demand but which you think, from an economic perspective or even perhaps from a social perspective, would have been better left undiscovered?
Lawton Burns: That’s when you get into the ethics of all this. Art Kaplan, over in the health system, is quite vocal about some of the lifestyle drugs, for impotency and things like that. The way some of these devices and products have been marketed to really appeal to a much broader class of people, and the way the advertising messages are crafted to appeal to a much broader set of people than was originally intended, that’s probably where the boundary line was crossed. I think that some of the same thing happened with the Merck-Vioxx case, and that was, Vioxx was made for a specific segment of patients. Then it gets overprescribed for broader and broader sets of patients, and that’s where those heart problems occurred. I don’t know if there’s specific technology we want to stop, it may, some of these new technologies may be applied too broadly to a wide sprectrum of the population.
Knowledge at Wharton: You talk a lot about the pharmaceutical, biotech, medical device, and IT sectors, and the growing convergence among them. What do you mean by that, and what are examples of this convergence, and what challenges does that pose?
Lawton Burns: OK, there are two type of convergence. One is on the R&D side. In order to develop a new product, a manufacturer in one sector, let’s say devices, needs to draw on another sector, such as a pharmaceutical company, who has a drug that can coat the device. That’s where we got drug-eluding stents. So that’s a convergent product in the sense that you needed inputs or supplies, components, from two different sectors. But convergent technology is also occurring in terms of the application, the commercialization of these products.
For example, we’re finding out now that to do a knee implant, or a hip implant, accurately, you need to have imaging equipment. And so you have multiple technologies being used as you’re doing a procedure. Another illustration would be how the pharmaceutical industry increasingly is relying on the imaging industry to look at what’s happening inside the body once this drug is administered. So both on the development side as well as on the application or commercialization side, you’ll find technologies being used increasingly with one another. The implications of that are manifold. One is, these products are more expensive. A drug-eluding stent costs $2500, versus a bare metal stent costs maybe $1000 at that. Secondly, it will require the manufacturers in one sector to increasingly know about the manufacturers in other sectors, because if products become more convergent, whether on the R&D side or on the commercialization side, you’re going to have to know a little bit more about the potential partners you’re going to have down the road as you develop your product line.
Knowledge at Wharton: A couple of questions about the convergent side. If, indeed, as you say these different sectors start to converge more, what kind of business models would work? For example, would you see more alliances? And to sort of expand on that question further, to what extent would you see alliances and globalization working hand in hand to drive down costs of developing new technology? To give, for example, in the area of implants that you mentioned, I know that there are now companies in, say, places like India that are offering hip implants and sun, sand, and surgery as medical tourism is a growth industry. Do you think any of these will have an impact on costs as well?
Lawton Burns: Actually, the convergent products tend to be more expensive. I don’t think convergence is going to drive down costs. In fact, I think it’s going to drive up cost. Just to give you one illustration other than the ones we’ve already done, now when implants are placed in, let’s say, the knee by an orthopedist, there is a tendency now for some orthopedists to use a biological agent to reduce infections and things like that, and when you add the biological product to the cost of the implant itself, it’s got a several-factor increase in the cost of the whole thing, without any proven efficacy. That’s where these things are going. We’re experimenting in some ways with these things. There’s a belief that the biologicals will help with the use of implants. I don’t see convergence leading to lower costs. I see it leading to higher cost.
As far as the alliances go, that’s a great question, because when you bring these convergent products together, let’s say for example a device and a pharmaceutical, like a drug-eluding stent, you have to look at the relative sizes of those two markets, the drug market and the device market, and the sizes of the companies coming together in that alliance. For a device company, the sales of that drug-eluding stent will be a major portion of its revenues. But for a pharmaceutical company, the sale of the drug that gets coated on top of the stent or the device is minimal. For them, the alliances just aren’t that big or that important. But for a device company, they’re incredibly important. There’s an asymmetry there in terms of whose interested in these things and just how much emphasis or investment they want to put into it. So that’ll make for a whole interesting area of research, looking at these rather asymmetrical alliances, where one party’s very interested in it, it’s a big part of their business model, but for the other partner it’s, you know, a sideline of interest.
As far as the going to India for having your surgeries done, there’s a definite trend for countries in southeast Asia to set up these places where you have an alternative place to get the surgery. I don’t think that has much to do with convergent products. That’s sort of a growing industry that I think will increase in importance. It’s going to be a very lucrative market for those countries in southeast Asia. I don’t know how many Americans they’ll be drawing, because most Americans, 85% have insurance coverage, but I think people in other places who have to wait, who face rationing and queueing, or who want to combine their surgery with a nice vacation, I think they’ll have a decided advantage.
Knowledge at Wharton: Your book describes the pace at which the healthcare industry has embraced IT as glacial, lagging far behind other industries. Why is that?
Lawton Burns: Healthcare has never invested much in IT. Recent statistics show that maybe healthcare invested up to three percent of its revenues in IT, which isn’t very big compared to other industries. Secondly, healthcare is burdened with what are known as legacy information systems. Providers are reluctant to swap those for the new systems that have come on the market that aren’t necessarily yet proven, that oftentimes there’s a lot of hype about the functionality of these systems. It’s one thing to have new information technology, but it’s a whole other issue to implement it and train people to use it, and what we learn from computerized physician order entry systems is that oftentimes those implementation and training costs dwarf the actual costs of the technology. It’s like, the other dollar of healthcare, IT spending.
A lot of providers are going into this field very slowly, because you don’t want to upset the system. All your downtime just messes up doctors trying to enter orders, or trying to dictate histories and physicals, or getting results back, and that slows down the system, you lose money on a big scale in real time once you try to swap information systems in and out. This is a natural reluctance to go into these things. I think, even looking at our own healthcare system, we’ve experimented and invested in lots of different information systems over the last ten, 15 years, and not all of them have been colossal successes. So there’s sort of a, I don’t want to say a cynicism out there, but there’s a real reluctant to drop something that works and that’s already been paid for, and then buy something new in which you incur some debt.
Knowledge at Wharton: You referred earlier to the fact that you didn’t see globalization particularly driving down costs as far as implants and devices was concerned. What about the globalization of R&D itself? A number of companies in emerging companies now almost seem to outsource or insource the ability to jointly develop new devices or new technologies. Do you see that having an effect on costs?
Lawton Burns: Let me just talk about globalization sort of globally first. That is, when you look at the healthcare system, there’s only one part of our healthcare system, or anybody’s healthcare system that’s global, and that’s basically the pharmaceutical industry, and to a lesser extent, the device and biotechnology industries. The pharmaceutical industry is truly a global industry. But after that, the rest of the healthcare system, the insurance side, the doctor side, the hospital side, the longterm care side, those are all local, or national industries at best. When you get to healthcare, the only global part of healthcare is some of the technology sectors themselves. I think what’s happening in terms of globalization is, you have a lot of countries who want to become biotechnology hubs. United States is still the leader in biotechnology, but other countries around the world want to become biotechnology hubs, as well. So we’ll have multiple hubs, more like a multiple domestic strategy rather than a global industry.
Same thing’s true of devices. Most of the big device companies are in the United States, then we have a handful in Europe. Here again, it’s more like a multi domestic strategy. We don’t really have global industries outside of the pharmaceuticals. So I don’t see globalization there being a big force to drive down costs. The one thing I do see in the pharmaceutical industry is that the pharmaceutical industry has basically outsourced R&D to the biotech industry, and that’s where a lot of the new products, the new approvals, in the drug industry are coming from. The pharmaceutical industry is also outsourcing a lot of the non-core functions of pharmaceutical research and development and commercialization. You have contract research organizations, contract sales organizations, outsourcing a lot of the filling and things like that. We’ve gone some of that and that has made that industry a little bit more efficient, but I don’t necessarily think those efficiencies are that great or that’s going to show up in the form of lower drug prices going forward.
Knowledge at Wharton: One final question. When you read the newspapers these days, there are two big stories that keep cropping up. One is that CEOs are overpaid, and the other is that pharmaceuticals charge too much for drugs. So there’s the continuing debate with pharmaceuticals being criticized for charging prices that are too high, making too much money, not being innovative. The pharmaceuticals will respond by pointing to the long lag times for drug development and the fact that they get more, quote, dry wells than wet wells. What’s your take on this debate?
Lawton Burns: There’s some truth to that. The pharmaceutical industry is subject to much greater risk and reward, and there’s a tremendous amount of risk in trying to develop a new drug. The number of dry wells vastly outnumbers the number of things that succeed. At the same time, the pharmaceutical industry has been, during the last ten years they’ve been suffering a productivity decline in terms of new drug approvals. They’ve spent a lot more of their money on marketing, especially ramping up their sales forces. So, if you had to point your finger at the pharmaceutical companies, it’s pushing pills would probably be the number one complaint. Maybe the price of drugs, but definitely the pushing of the pills.
You can see that there’s a backlash now, even our own healthcare system among many other large healthcare systems in the country, are now either barring pharmaceutical sales reps from coming in the door, or they have standards of engagement such that when the sales reps come in it’s on the hospital’s terms, not the sales rep’s terms. I think that’s one way to limit some of this overinvestment in marketing. But that’s, as we make the point in the book, these companies succeed on two grounds. One is coming up with a new innovation, and the second is commercializing it. And the sales reps are on the commercializing side of it, so you can understand when the pharmaceutical companies have a problem on the R&D side they ramp up on the commercialization side, and start selling the heck out of whatever it is they have.
