Incubators could help medtech innovators hatch new products…and get them to market

Health Care Current | April 25, 2017

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

My Take

Incubators could help medtech innovators hatch new products…and get them to market

By Sarah Thomas, managing director, Deloitte Center for Health Solutions, Deloitte Services LP

To improve health care, it often makes sense to invest in innovations that build upon existing technologies and new approaches that address the many health conditions for which there are no effective treatments. Innovations that reduce costs and morbidity are especially welcome.

While engineers and scientists continue to develop new technologies, they can run into barriers when building a case for their innovations, getting them approved, and then getting them reimbursed so that patients can benefit. Compounding this issue is commonly payment and delivery system reform, which is changing the way many providers select and use medical technologies. These challenges might be behind a decline in venture capital investment in the medtech sector. Consider this: Medtech’s share of venture capital has fallen from 13 percent in 1992 to 4 percent in 2014. Moreover, the number of medtech startups created each year is declining.1 If funding dries up, future innovations could be at risk.

These thoughts went through my mind a few weeks ago as I was sitting at the Cooley 10th annual conference on Medical Technology Growth in San Francisco.

A panel on incubators and accelerators discussed some of the challenges in advancing medtech innovation. The panel featured four incubators, each with different business models and funding approaches (e.g., some accept venture capital funding and others do not). Although each of the four panelists (representatives from companies including MedTech Innovator, Cedars-Sinai Accelerator powered by Techstars and StartXMed at Stanford) are somewhat different, they appear to share a common desire to nurture and foster innovators who have compelling ideas and strong scientific backgrounds, but lack experience in bringing products to market.

Dr. Fred St Goar, director and chairman of the Fogarty Institute for Innovation, spoke right before the panel. Fogarty has developed an innovation program for startups and other companies, and an education program to foster new inventors. The institute is located on the campus of a hospital, and has its own lab and engineering space. The location gives inventors an opportunity to observe physicians and medical staff and learn about their biggest clinical and non-clinical challenges. The inventors can then work with these practitioners to test their innovations in the field.

Some interesting themes for identifying promising new technologies and bringing them to market emerged from this conference.

My takeaways:

  • There are some remarkable technologies and interesting ideas out there, but not all of them may meet a market need. Each incubator or accelerator has a competitive approach to winnowing down the most promising ideas. Some require the innovators to show funding of their own – this helps to limit the number of technologies that later-stage investors might evaluate. Not all investment is equal. Investments from people knowledgeable about a technology’s potential value, for example, might be worth much more than funds raised by family and friends.
  • Several incubators provide access to clinical settings where inventors can test devices and gather real-world input from clinical teams. This may be increasingly important as the health care system transitions to value-based care. New payment models create financial incentives for physicians to use products that not only meet clinical needs, but also help drive greater efficiency and improve non-clinical patient outcomes. This may be necessary but not likely sufficient to help inventors discover the value proposition from the perspective of the people who actually buy the inventions – the procurement and administrative staff.
  • Incubators can educate and challenge inventors to articulate the business case for their products. Inventors typically don’t think about insurance coverage or reimbursement, but those factors can be critical to creating access for patients and ultimately market success. Entrepreneurs often struggle to understand the reimbursement pathway for their products, as well as the hurdles to getting payment approved. This can be even more challenging as the reimbursement landscape shifts and payers place greater emphasis on new reimbursement arrangements that hinge on demonstrating value.
  • Incubators, venture capital firms, and accelerators might decide to financially partner with some inventors once their technologies develop. This can be an interesting way for large, established companies to develop a pipeline of new products and other offerings.

The Center for Health Solutions is working on a research project with The Advanced Medical Technology Association (AdvaMed) that will look into how medtech companies can better partner with early-stage innovators. In recent years, many medtech companies have turned to mergers and acquisition to build growth and scale in response to an increasingly competitive marketplace. But there will likely be fewer innovators for medtech companies to acquire in the future if start-ups continue to face hurdles, and if investor interest continues to decline.

The challenge we are trying to address in our research is understanding why many larger companies are only investing in late-stage companies. How do we bridge the gap between early stage and large company investment? Some of the specific ideas we are exploring are whether to get the larger companies to invest earlier through different types of partnerships, or push innovation far enough along so there is a pipeline for larger companies. We would also like to determine whether incubators are financing companies up to the point that larger established companies would decide to invest. Medical technology companies may want to consider adapting the “build-to-buy” model, which has been successful for many pharmaceutical companies, versus the old “build-and-grow” a company.

Our hypothesis is that larger, established medtech companies have the opportunity to bring novel innovation to market through partnerships and alliances with these organizations. Participation with incubators seems to be one promising approach. It leverages the creativity of startups and mixes in the expertise and experience for what it takes to successfully bring products to market. Picking good incubators and accelerators is likely key as they are equipped to accelerate the path to access. Other companies may learn from these incubators about models they can adopt themselves to foster innovation.


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In the News

New CMS guidance gives states more authority to certify QHPs

Last week, the Centers for Medicare and Medicaid Services (CMS) announced the agency will no longer review drug formularies, network adequacy, and licensure requirements of qualified health plans (QHPs) sold in states that use Instead, beginning with the 2018 plan year, the agency expects state insurance regulators to review these things. CMS cites Executive Order 13765, which directs federal agencies to provide greater flexibility to states to implement health care programs, as the reason for the change.

Today, seven states have opted to use to perform plan oversight functions, including monitoring, providing technical assistance, and evaluating rates and benefits for plans sold on their exchange. However, CMS makes the final determination on whether plans meets QHP criteria.

Beginning for plan year 2018, the guidance calls for states using to review:

  • Licensure and standing: State regulators already maintain license records, perform audits on health plan performance and conduct, and keep record of other documentation required for plans to offer products in the state. The new guidance states that CMS will no longer review health plans’ licenses, but rather confirm with state regulators that their documentation is current.
  • Network adequacy: CMS will rely on states to review network adequacy. In states that do not conduct reviews, CMS will defer to US Department of Health and Human Services (HHS)-recognized accrediting entities (e.g. the National Committee for Quality Assurance) to determine network adequacy.
  • Service areas: CMS will rely on states to determine whether QHPs meet state service area requirements. The federal government will review service areas of plans in states that do not review service areas.
  • Prescription drug formularies and cost sharing: CMS will defer to states that review prescription drug formularies and rules that prevent discrimination in cost sharing. These might include placing all drugs that treat a certain disease or condition in the highest tier on the formulary or limiting access to benefits based on age without medically appropriate reasons. CMS will conduct the reviews in states that do not review prescription drug formularies and cost sharing.

The new guidance amends the 2018 Letter to Issuers released last December, which outlined how the agency would regulate plans sold on the federally facilitated exchanges (see the December 20, 2016 Health Care Current). The guidance does not affect states that operate their own exchanges.

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CMS increases payments to hospitals and asks for ideas for cutting hospital regulations

Earlier this month, CMS proposed changes to the Inpatient Prospective Payment System (IPPS) for fiscal year FY2018, requested input on Affordable Care Act (ACA)-imposed restrictions on physician-owned hospitals and asked for ideas to cut regulations for hospitals.

Hospitals would see payments increase by 1.6 percent under the IPPS if they meet the requirements of the Hospital Inpatient Quality Reporting Program and are meaningful users of electronic health records (EHR). CMS expects total Medicare spending on inpatient hospital services will increase by about $3.1 billion in FY2018.

CMS requests information on physician-owned hospitals and ways to reduce regulatory burden on hospitals. The ACA prohibits physician-owned hospitals from expanding facilities without explicit approval from the HHS secretary. Other recommendations could address payment system reform, reporting, and monitoring requirements. The agency says it aims to improve the health care delivery system through transparency, flexibility, simplification and innovation, and is seeking feedback will help shape future regulatory action.

Other changes in the proposed rule include:

CMS is accepting comments on the proposed rule and the request for information until June 13, 2017.

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New bill would cap non-economic claims amounts for medical malpractice lawsuits

Lawmakers in the House of Representatives recently introduced a bill to curb federal health care spending by limiting superfluous medical malpractice lawsuits. If enacted, the bill would cap medical malpractice claims for noneconomic damages at $250,000 for care paid for or subsidized by the federal government, including for government employees and those covered by Medicare, Medicaid, the Veteran’s Health Administration, or for public exchange beneficiaries who receive a subsidy or tax benefit.

Non-economic damages include claims for emotional distress, suffering, or mental anguish. The bill would not pre-empt state law, so states would be able to set their own caps and exceptions. California, for example, already limits noneconomic damages in all medical malpractice cases to $250,000, but exempts elder abuse cases from this limit. The bill would not limit how much patients could collect in economic damages, which include medical expenses and lost earnings.

The bill also would prohibit naming the prescribing physician if a patient sues a product manufacturer for FDA-approved drugs or medical devices.

The Congressional Budget Office (CBO) estimated the bill would reduce the federal deficit by nearly $50 billion over ten years. CBO says that physicians can over-utilize diagnostic tests and other services as a precautionary measure against lawsuits, often called “defensive medicine,” which significantly contributes to the overall cost of care. It projected that physicians would be less inclined to practice defensive medicine if the legislation passed. The American Medical Association (AMA), American Hospital Association, and American Health Care Association support the bill. But, some stakeholders from the medical device industry said that limiting liability for clinicians could unfairly increase the burden on device manufacturers.

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HIMSS: HHS should delay new HIT certification requirements

Earlier this month, the Healthcare Information and Management Systems Society (HIMSS) sent a letter to HHS Secretary, Tom Price, asking the agency to delay the effective date for new EHR certification requirements. HIMSS said few health information technology (IT) vendors can meet the updated EHR criteria.

The final rule for Health IT Certification Criteria (2015 Edition) established certification requirements for health IT systems for the Office of the National Coordinator for Health Information Technology (ONC). To qualify for incentives under The Medicare Access and CHIP Reauthorization Act of 2015’s (MACRA) Quality Payment Program (QPP), providers must use an ONC-certified EHR.

Under the final rule, by January 1, 2018, health IT systems must:

  • Meet requirements for rigorous testing of health IT data exchange capabilities
  • Increase the transparency and reliability of products by conducting in-the-field surveillance
  • Use vocabulary for recording health information, including a Common Clinical Data Set, and create pathways for exchanging that data across platforms
  • Participate in the open data certified HIT product list, which publishes data about health IT products to assist providers in selecting EHR products

HIMSS asked HHS to delay the requirements by six months, to July 1, 2018. HIMSS said that it usually recommends that ONC publish the final rule at least 18 months before its implementation, and ONC did this for the 2015 Edition. But, it said that health care stakeholders did not have access to the finalized test tools that are required for software development and readiness testing until recently. HIMSS joined a growing group of health care stakeholders and IT executives requesting a delay, including the College of Healthcare Information Management Executives and the AMA.

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GAO: CMS and states should share information on improper Medicaid payments

According to the Government Accountability Office (GAO), Medicaid continues to be at high risk for fraud. The Senate Finance Committee asked GAO to look at how CMS works with states to reduce improper payments in Medicaid. The agency found that sometimes CMS contractors and states work together to review the accuracy of payments, but other states have reported barriers to conducting collaborative audits. Collaborative audits are payment verification efforts that involve both CMS and state Medicaid agencies.

GAO investigated:

  • How CMS adjusts its reviews to consider different state circumstances
  • States’ ability to participate in collaborative audits with CMS
  • CMS’s processes for sharing best practices

Though CMS has improved and adjusted its oversight to state’s needs, GAO recommended that CMS consider:

  1. Adapting audits to align with states’ needs and capabilities, particularly when looking at managed care delivery systems, which GAO said are at high risk for improper payments. Some states have staff limitations and other barriers that may limit their participation in collaborative audit activities.
  2. Collaborating with states to develop a systematic approach to collecting and disseminating integrity review practices used by states that work well.

The lack of a systematic approach to collecting and disseminating information highlights the need for better oversight and stronger support for efforts at the state level, according to a statement from Senate Finance Chairman Orrin Hatch.

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Wisconsin announces 1115 Medicaid waiver proposal

The Wisconsin Department of Health Services announced it is submitting a waiver request to CMS next month to reform BadgerCare, its Medicaid program. BadgerCare provides health care coverage for individuals with incomes at or below the federal poverty level (FPL, $12,060 for an individual and $24,600 for a family of four).

Under the proposal, childless adults with incomes above 20 percent of the FPL would have to pay monthly premiums ranging from $1 to $10 per household. Beneficiaries would also face co-payments for emergency room visits, starting at $8 for the first visit and $25 for each subsequent visit in the same year. Beneficiaries could reduce their premiums by 50 percent in exchange for completing a health risk assessment and engaging in certain healthy behavior.

Wisconsin would limit the duration of enrollment for childless adults to four years unless they could show they meet other program requirements, including working. After 48 months of enrollment, individuals would lose coverage for six months. However, if a member is working, participating in a job training program, or is a full-time student, that time would not count toward the eligibility cap. CMS leaders have said they support policies that encourage childless adults receiving Medicaid benefits to seek employment (see the March 21, 2017 Health Care Current). However, in the past, attempts to place time limits on Medicaid coverage have generally been rejected.

Wisconsin would require childless adult applicants to submit to a drug test, and applicants who test positive would be deemed ineligible for benefits and instead referred to substance use disorder treatment. Wisconsin will also request a waiver from the Medicaid institutions for mental disease exclusion to provide coverage for up to 90 days of residential substance use disorder treatment services.

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NASHP: Maine’s “invisible” high-risk pool can provide lessons for stabilizing the individual market

A National Academy of State Health Policy’s (NASHP) review of Maine’s approach found that an “invisible” high-risk pool may help stabilize the individual market. In 2011 Maine established a funding program for high cost enrollees. It combined reinsurance with a high-risk pool. It also expanded the premium rating bands from a 1.5:1 to a 3:1 ratio. Premium rates dropped by half and plans guaranteed coverage for individuals with pre-existing conditions.

Traditional high-risk pools place high-cost enrollees in a separate health plan. In Maine’s invisible high-risk pool, however, high-cost enrollees were not removed from the plan or charged a higher premium. Instead, individuals were assigned to the invisible high-risk pool based on a series of health-related questions they answered when applying for coverage. If an enrollee developed a high-cost condition after they enrolled, the health plan remained fully responsible for all costs.

NASHP looked at how the individual market reacted under the high risk pool and found:

Savings came from the high-risk pool and benefit limits
The invisible high-risk pool and expanded rating bands reduced premiums by 20 percent and attracted young and healthy enrollees, particularly, in lower-cost areas of the state. While the high-risk pool helped to lower costs, lower costs were also a result of decreased benefits. Public Law 90 allowed health plans to provide coverage with fewer benefits and higher cost sharing and deductibles. Many health plans, for example, eliminated maternity benefits. Older individuals and people in higher-cost, usually rural areas of the state, saw higher premiums.

The invisible high-risk pool and other factors increased enrollment
Prior to the launch of the invisible high-risk pool, Maine’s largest individual market insurer, Anthem, saw declining individual market enrollment. But 18 months after the invisible high-risk pool started, Anthem’s individual market enrollment climbed 13 percent. However, other market forces also contributed to Anthem’s member growth. The economy was improving, and Maine’s Dirigo Health program, which provided subsidized coverage to individuals and employees of small businesses, capped enrollment at the same time as the high-risk program was launched.

Financing was adequate
The program was funding through plan-paid premiums into the high-risk pool and an assessment on insurers. Premiums covered about 42 percent of all claims. The remainder of the costs were financed by a $4 per-member-per-month assessment fee on all plans. Unlike other high-risk pools that have depleted their funds, Maine had enough money to cover its costs. The reinsurance program paid 90 percent of claims that fell between $7,500 and $32,500 and 100 percent of claims above $32,500.

The current administration has proposed adopting similar measures to stabilize the individual market and improve the risk pool for plans in the individual market. HHS Secretary, Tom Price, is encouraging states to use Section 1332 waivers to create high-risk pools or state-operated reinsurance programs.

(Source: Riley, “Should Maine’s invisible high risk pool law be the model to address market stability nationally?” NASHP, April 2017)

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Breaking Boundaries

VA offers new online access and quality tool

Last week, the Department of Veterans Affairs (VA) launched a new online Access and Quality Tool to help veterans get patient wait time and quality of care data. The website,, provides patients of the VA health system the ability to answer four questions: How quickly can my VA facility see me? How satisfied are veterans with their care in my facility? How does care in my VA facility compare to other hospitals in the area? How is the VA system doing with access nationally?

Veterans can use the tool to compare average times in their local area; how other patients are experiencing scheduling primary and specialty-care appointments at specific VA facilities; timeliness of appointments for care needed right away; and compare certain quality measures for VA medical centers with private-sector hospitals in their area. The tool provides data on quality measures found on the CMS Hospital Compare site. The next phase of the tool will include outpatient measures.

Officials at VA said that the tool will likely encourage competition and spur the medial facilities within the system to proactively address access and quality. Studies have shown that data on how their peers are doing in certain measures motivates physicians to improve. The new tool also helps empower veterans through more information and transparency about the often complex health system.

An innovative culture is imperative to VA, which is the nation’s largest integrated health system in the US. In addition to serving almost nine million veterans annually at over 1,700 care sites, it is also the nation's largest provider of graduate medical education and is heavily involved in medical research. A 2010 study from the Center for Information Technology Leadership found that its investment of $4 billion on health information technology in the previous decade generated $3 billion in savings by eliminating problems that plague many hospitals and health systems, such as duplicative testing and in efficient operations.

Related: Last week, the President signed legislation extending the Veteran’s Choice Program, which was set to expire in August. The legislation allows the VA to spend $1 billion in remaining funding to subsidize non-VA medical care for veterans who face long wait times or distances to access VA medical facilities. The bill passed the House and Senate earlier this month, however, lawmakers are interested in figuring out long-term solutions rather than emergency funding in the future.

As discussed in Deloitte’s health policy belief, Realizing the potential of telehealth, VA’s progress in telehealth is an example of its early accomplishments in developing innovative strategies to increase patient access. VA served over 150,000 beneficiaries with telehealth services in 2012. Telehealth was associated with a 25 percent reduction in number of bed days of care and a 19 percent reduction in hospital admissions across all VA patients. VA studies show videoconferencing can successfully treat post-traumatic stress disorder, and that treating mental health issues via telehealth can be effective when compared to face-to-face visits.

(Source: Allison Liebhaber, Debra A. Draper, Genna R. Cohen, Hospital strategies to engage physicians in quality improvement, October 2009)

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