A new analysis says the U.S. medical-device industry is facing unprecedented challenges that could prove catastrophic not only to the industry itself and the livelihood of its employees, but to the health of the patients who benefit from its technologies.
“For decades now, the United States has fostered an ideal environment for medical innovation, allowing it to become a world leader in the field, and resulting in significant advances in healthcare technology,” said Yair Holtzman, the report's author and director of the global life-sciences practice at global tax advisory firm WTP Advisors.
“But mounting threats to the industry from within the U.S., coupled with a flourishing medical-technology industry abroad, are putting these advances at serious risk,” he said.
“If we don't do something now, we will see the U.S. market wither, along with our health and our economy.”
In the report, Holtzman said that “the U.S. medical-device industry faces the confluence of many internal challenges. Four significant weaknesses [are] a growing talent and development gap, a slow and cumbersome regulatory system, an excise tax on medical devices, and a lack of a permanent [research and development] tax credit.”
Holtzman interviewed 28 CEOs from medical-device companies in the United States, China, the United Kingdom, Germany, France, Brazil, Israel, Japan and India for the report, which was published July 17 by White Plains, N.Y.-based WTP.
Other reasons why the U.S. leadership in the $350 billion medical-device market is being challenged include weak gross domestic product and high unemployment numbers in much of the developed world, he said.
“Western governments are faced with unprecedented levels of debt and are taking extreme measures to slash budgets,” Holtzman said. “Developed nations like the United States are slipping in their capacity and capability for innovation, while emerging markets are rapidly gaining ground.”
To keep the U.S. from losing ground in medical market, Holtzman said the 2.3 percent excise tax on medical devices — scheduled to go into effect in January — must be repealed; the approval process at the Food and Drug Administration must be reformed; and the U.S. must make the R&D tax credit permanent as well as develop a tax policy that stimulates innovation and discovery.
“Not repealing the medical-devices tax ... could be devastating to innovation, patient care and job creation,” he said.
Holtzman pointed to a study conducted for Washington-based AdvaMed — the Advanced Medical Technology Association — that claims the tax could ultimately cost more than 45,000 U.S. jobs.
As for the FDA, it must continue to ensure the safety and effectiveness of products, Holtzman said. But, he said the FDA approval process is too unpredictable, inconsistent and time-consuming, especially when compared with faster regulatory approval processes in Europe.
“The U.S. medical-device industry is a highly regulated sector of the economy plagued with bureaucracy and complex regulations,” said Holtzman's report. “The FDA review process is almost twice as long as that of its European counterpart, the European Medicines Agency for devices not requiring clinical data, and almost three times as long for devices that do.
“Real-time patient diagnostic data could prove as valuable as the newly developed medical device for some product categories,” the report said. “In tandem, a new device, with rich patient diagnostic data and a full array of supportive services might prove essential as the key for the future success of the medical-device industry.”
Discoveries and advances in materials, engineering, physics and computing are fueling the medical-device industry and the creation of new treatments and cures in “this new century of life sciences,” Holtzman said.
“Mobile health, value-based purchasing, and personalized medicine will also drive more cost-effective, outcome-based initiatives and greater collaboration among payers, providers, and the medical-technology industry to develop and deliver complete patient-centered solutions,” the report said.
More than half of the leading global medical-device companies today — including 32 of the 46 companies with $1 billion or more in revenue — are based in the U.S. and those companies employ 400,000 people and indirectly provide 2 million more jobs in the U.S., said the WTP report.
“Between 2005 and 2007, the industry created 80,000 new jobs [and] from 2007-09, R&D investment in medical-devices increased by 9 percent,” said the report. “Not only is the industry a source of life-enhancing and life-sustaining treatments and cures, but it is also an important manufacturing industry and a driver of current and future U.S. economic growth. It is one of the few American manufacturing industries that consistently exports more than it imports.”
The report pointed out that medical exports doubled between 1998 and 2008, to $33 billion annually.
Holtzman said U.S. medical-device manufacturers will continue to benefit from an aging U.S. population. Also, he noted that “the influx of newly insured people due to the health-care reform bill will drive up demand for devices.”
“The United States spends a larger percentage of its GDP and more per capita on health care than any other country,” he said. “It is the largest health-care market and should remain so during the next decade.”
As a result, the report called the “future potential for U.S. economic growth driven by the medical-technology industry ... tremendous.”
“Worldwide markets for medical technology will expand dramatically as populations age in countries across the globe,” said the report. “Hundreds of millions of people in countries like India and China will enter the middle class and demand modern, quality health care.”
However, the regulatory environment is growing more stringent, which will decrease profits and force some companies to shift functions overseas, he said.
He believes that revenue growth in the medical-device industry will slow down over the next five years, while regulations become even stricter.
“The Patient Protection and Affordable Care Act of 2010 will place an excise tax on medical devices, eating into revenue and reducing profit,” he said. “Also, potential reform to the approval process for new devices will likely hamper innovation and encourage more companies to shift functions overseas.”
The report also claims that the outsourcing of manufacturing, R&D, and other operations from the United States to other countries, in combination with the ongoing industry consolidation, will decrease the number of medical manufacturers in the U.S.
“During the past five years, consolidation has swept the industry, with the number of companies decreasing at an average annual rate of 5.5 percent to total 828,” said Hotzman's report.
“Meanwhile, emerging markets like China and Brazil will attract medical-device manufacturers, as U.S. customers face more stringent Medicare reimbursement requirements and other cost-cutting pressures.”