Dollens: Reimbursement Uncertainty May Slow Innovation

Ron Dollens knows a little bit about innovation, and he’s worried.

In a keynote address that opened our In3 East Conference, the former president and CEO of Guidant Corp. warned that the instability of the current reimbursement system is threatening innovation in the life sciences sector.

“Health care policy is the strategic issue,” warns Dollens before a packed room at the Westin hotel in Boston. “If health care policy is not right, this sector will not be able to attract the financing capital required for early-stage companies, and those are the companies where breakthrough things happen. And if the financial capital is not available then the intellectual and human capital won’t follow, and it’s the human capital that is the source of all the creativity.”

Dollens says the Centers for Medicare and Medicaid Services (CMS) needs to work more closely and cooperatively with industry as well as with the Food and Drug Administration. A green light from the FDA means considerably less without a reimbursement code with which a company—and ultimately its investors—get paid.

In his address, Dollens says “risk capital” aka venture capitalists pay for 20% of all innovation in life sciences and medical devices. The figure goes up if you factor in private equity firms, he says. If private equity and venture capital investors don’t see the potential for “above average return” on their investment, they’ll walk.

“Do VCs have to invest in life sciences? Are there any barriers to where the money flows? The answer is obvious. They are not,” says Dollens. “They’re not tied to health care. They are not tied to life sciences.”

Dollen holds Guidant up as a prime example of the power of innovation. The company was built around its ability to discover and develop new products. At any point in time, two-thirds of Guidant’s sales came from products that were less than 12 months old, and Dollens says that ability to innovate was an asset its suitors sought to acquire (along with its existing businesses, of course).

The Eli Lilly spin-off grew from a $1 billion company in 1994 to a $27 billion company in 2006 when Boston Scientific outbid Johnson & Johnson to buy the company. (For BSC CEO James Tobin's take on the integration of Guidant, go here.)

In a question and answer session with colleague David Cassak and the audience following the address, Dollens questioned whether Guidant’s rapid rise could be recreated today. “I think you could,” he says. “But I don’t think you’ll have the market capitalization because of the health care policy concerns.”

Patients and physicians have an appetite for new technologies, but Dollens wonders where there's an equal desire to pay for them. He suggests the primary purpose of Health Care Technology Assessments—the extensive study of a device's technology and impacts on health care—is to keep a lid on costs.

More ominously, Dollens recalled a meeting Guidant officials had with CMS “a couple of secretaries ago” seeking reimbursement for a new device that already had received FDA approval. The Guidant officials presented the data showing that the company's device improved mortality rates in a certain patient profile.

He said the secretary’s first question was, “`Well how many patients are we talking about?’”

“He can ask that question for one of two reasons: one because he could be concerned about how many lives we were potentially going to save…”

“Or,” Cassak offered, implying CMS was concerned more about how much the new device would cost.

“And I think it’s the 'or’,” Dollens concluded.