The year ahead: Fairly positive prognosis for U.S. medical manufacturing sector

The United States remains the largest medical device market in the world, with a projected market size of $155 billion in 2017, according to inward investment body SelectUSA. Representing approximately 43% of the global medical device market, the medical device sector outperformed the wider healthcare market in 2016 on an equity basis, and this trend will continue in 2017, according to Jamie Davies, Head of Pharmaceuticals, Medical Devices & Healthcare at BMI Research (London).

While the new year is not without its challenges for the medical device industry—lingering reimbursement issues, a business model that is shifting to value-based care and overall uncertainty—a compelling case can be made that 2017 will smile broadly on the sector. Here’s why.

Let’s begin with the (orange) elephant in the room. Under a Donald Trump presidency, it is practically a certainty that the 2.3% medical device excise tax, which is part of the Affordable Care Act (ACA), aka Obamacare, will be repealed. It was suspended for two years in 2015 as part of a package of spending and tax cuts and is supposed to be reinstated at the beginning of 2018. Now, it looks like the tax will be permanently repealed, one of the first cracks in the ACA edifice that President-elect Trump and Republicans have pledged to repeal and replace.

The medical device industry has lobbied aggressively against the device tax, claiming that it is a “job killer” and a drag on R&D spending, and so will cheer this development. The picture is a bit murkier when it comes to gutting the ACA, however, where industry has largely been agnostic. Much will depend on what the replacement will look like, and that is difficult to discern at this stage beyond the tenets of a “free market” solution that expands the use of Health Savings Accounts and allows the sale of insurance across state lines. A headline in the January 4 edition of the Los Angeles Times sums up the current situation quite well: “GOP, now able to repeal Obamacare, not sure how.”

Recognizing the complexities of dismantling the current healthcare system, many Republicans are advocating a tiered approach, voting for repeal early on but delaying implementation by a couple of years, maybe even longer. What impact will this have on the medtech industry? It could be business as usual while Congress sorts out an alternative policy or “it could have chaotic effects on the market, as millions of Americans lose their newly acquired insurance,” writes business intelligence company GlobalData (London) in its white paper, “Top 10 Trends in Medical Devices in 2017.” We will soon find out.

Will deregulation push its way into the medical space?

On the regulatory front, the device industry is understandably heartened by Trump’s promise to reduce federal regulations, in general, but it’s unclear if and how that might affect the medical device approval process.

In a report from PwC’s Health Research Institute, the authors note that “Trump views healthcare as an industry that should look and feel like other industries, complete with market competition and consumer choice. From that perspective, Trump likely will first use traditional open-market levers to affect prices, a move that may be well received by the public.” The report goes on to say that a reduction in federal regulations may make it easier for new entrants to “break into the highly regulated areas, especially around medical devices and new therapeutics.”

The 21st Century Cures Act, which was signed into law by President Obama last month, may help in this regard. One of the provisions reduces the amount of paper work that medical device companies need to submit to FDA to gain approval for breakthrough technologies that can have an impact on the treatment or diagnosis of life-threatening or debilitating conditions. “The 21st Century Cures Act is a win for patients and for medical innovation,” wrote AdvaMed, the trade association for the medical device industry. “When fully implemented, this legislation will help accelerate the discovery, development and delivery of medical advancements to ensure more timely access to new treatments and cures for patients in need.”

Accelerated approvals for the medical device and pharmaceutical industries is only one aspect of the law, which also allocates funding for cancer research, mental health initiatives and much more. It has not been universally praised, it should be noted, and has been called a huge handout to Big Pharma, in particular. Some have also argued that medical device manufacturers could take advantage of the breakthrough device exemption.

Impact of value-based healthcare

The move away from the fee-for-service payment model in favor of value-based healthcare has been building steam for some time now, but it will increasingly become a high priority for medical device manufacturers. The training wheels are coming off, writes the PwC Health Research Institute in its report on the top health industry issues of 2017.

Value-based healthcare takes into account a number of factors in patient treatment—readmissions, hospital-acquired infections and other complications—to establish reimbursement rates and not simply each individual procedure.

Consequently, medical device companies will need to reevaluate their product portfolios and include a range of tools tailored toward physicians and hospital groups, writes business intelligence company GlobalData in its report on the top 2017 trends in medical devices. These tools include applications and services that help physicians monitor patient outcomes, guide hospitals toward cost savings and assist in improving clinical outcomes. “These collaborations with healthcare providers will deliver an edge to manufacturers willing to adapt to providers’ growing needs. Additionally, evidence-based care and treatment paradigms will increase in importance, as hospital purchasing groups seek to lower expenditures,” writes GlobalData. “In 2017, data exhibiting cost effectiveness and exceptional clinical outcomes will be paramount, and medical device manufacturers will need to focus efforts on generating effective data in a format that hospitals and physicians find useful.”

The shift to value has been a durable trend with the potential to disrupt many players in the industry, adds the PwC Health Research Institute in its annual report on the healthcare industry. “It is a trend that may be magnified by the new administration, as it seeks to reshape the industry with more free market approaches,” it adds.

And so, fittingly, we end this look ahead into 2017 roughly where we started—pondering the Trump effect on the medical device industry. It’s a sign of the times.