Health care cost containment may be blunting America's edge in high-tech medicine. For years the medical technology industry has been riding the crest of an expanding health care system. Innovation in the field has been subsidized directly by government research and indirectly by a generous health insurance system. But the flow of dollars is drying up. And the impact on medical innovation at home and industry competitiveness against foreign manufacturers is not yet clear.
At issue is how well the industry will adapt to a new environment in which the price of the product is as important a factor as technological advancement.
The stakes are high. Worldwide sales of medical equipment and supplies last year by American companies were almost $20 billion. This meant nearly 217,000 jobs for American workers.
Until recently manufacturers of medical equipment have been selling their products in a market in which money was no object. The size of the health care market -- 11 percent of the gross national product -- and the structure of health insurance coverage had encouraged manufacturers to compete by creating the most advanced medical technology rather than the least costly product.
The very design of health insurance coverage -- both government and private -- has provided a built-in stimulus to high-tech medicine. Insurance policies pay only a fraction of the cost of a doctor's advice to his patient. But they return 100 percent of his charge for an electrocardiogram or a brain scan done on an expensive machine.
Doctors have long recognized that the fancier the gadget, the bigger the pay-out. "If I wanted to make my practice more profitable," says a prominent Washington internist, "I would buy more equipment."
Doctors who use the most modern equipment in their offices demand similar high-tech surroundings at the hospital. Institutions vie for doctors, and the patients they bring with them, by offering the most advanced technology.
Until recently private insurance companies and the government -- principally through Medicare -- have encouraged this technological one-upmanship.
Traditionally, insurers paid hospitals whatever they spent for the care of their patients. This payment system, combined with the natural desire to preserve and prolong human life, has fostered costly heroic measures and expensive life-sustaining equipment.
While the artificial heart has attracted the most attention among the new medical developments, there are scores of new-age technologies making their way into use, including the laser scalpel and the implantable infusion pump, a device that delivers medication at a constant rate to a targeted site in the body.
In addition, technological advances are being made in devices already in common use such as the pacemaker, the kidney dialysis machine and the computerized tomography (CT) scanner.
American manufactureres of this high-tech medical equipment have established a strong position in the world marketplace. From 1973 to 1983, when total U.S. merchandise trade ran a deficit in eight of 10 years, the U.S. trade surplus in medical devices was growing steadily. Exports of the most advanced medical devices grew during that period at an annual rate of nearly 28 percent.
Since 1983, however, health device imports have been rising faster than exports. But the U.S. continues to maintain a substantial trade surplus in this market. Even with the strong dollar making sales abroad difficult, American exports last year exceeded imports by two thirds.
But the health care money tree is thinning, altering the financial picture for the health industry and its suppliers. The 1983 changes made by Congress creating diagnostic related groups (DRGs) in the Medicare program have made the health care system more price sensitive.
The Medicare prospective payment system now pays a hospital a fixed price for treating a patient with a particular illness. Since preestablished prices, not costs, are now the basis of payment, hospitals have begun looking for the most cost-efficient method of providing care.
Private insurers are following the government's lead and tightening outlays. Some are mimicking the federal method of payment and others are developing their own means of squeezing hospital costs.
The impact of these changes on the medical technology industry is still uncertain because there is conflicting evidence about whether purchases of high-price, high-tech equipment are dropping.
Helen Cummings, vice president for Health Finance Resources of the Hospital Corporation of America, the largest for-profit hospital chain in the country, has not seen purchases drop. Cummings believes that equipment acquisition at HCA and other facilities may actually be on the rise as hospitals with declining numbers of patients try to attract doctors by offering the most advanced technology.
"My impression is that the cost of equipment is going up rather than down and that there has been an increase in the purchase of medical equipment," says Cummings. "Our hospitals are wanting the latest in equipment so they can attract patients."
But most observers see purchases leveling off. According to the Health Industry Manufacturers Association, sales of the most expensive medical equipment increased in 1984 by only 23 percent, compared with 25 percent in 1983.
A study conducted by the Health Strategy Group, a New York-based marketing research firm, projects a 20 to 22 percent decrease in hospital purchases of supplies and equipment. John Fiorillo, the firm's president, says, "You get a clear sense that new technology which is not cost efficient is not being purchased."
Most experts agree that there is a shift toward technologies which save money. "The aim is to do it at a lower cost," says Don Sutherland, director of investment affairs for DuPont, the manufacturer of a machine that monitors drug levels in the blood to assist doctors in prescribing optimum dosages for individual patients.
"The CT market in the U.S. compared to 1983 may be down by half," says Walter Robb, vice president for the Medical Systems Group at General Electric, the largest producer of CT scanners in the world. Robb foresees all manufacturers of CT scanners coming out with lower-cost models. "They will be less powerful; they will have fewer detectors," he says.
There is already evidence that less money is going into research and development. "The amount of R & D being done on new technology is dropping dramatically," says Robb.
Historically, R & D spending by the medical manufacturing industry has been high. A National Science Foundation study showed that medical equipment manufacturers spend nearly twice as much on R & D as other industries. The study also revealed that from 1974 to 1980 R & D in the medical device industry grew at a rate of 16 percent a year -- 25 percent faster than the rate for industry as a whole.
"In the face of the DRGs, new technological therapies that are not concerned with cost will probably not get developed," Dupont's Sutherland says.
The Office of Technology Assessment, a research arm of the Congress, is preparing a study looking at the potential impact of prospective payment on six specific medical technologies. Judy Wagner, who is working on the study, agrees that R & D is likely to emphasize more cost-efficient products.
Wagner stresses that inherent in the passage of prospective payment was the view that medical products were too expensive, that too much was being purchased and that the system was too fat. She sees some problems with the changing direction of R & D, however. "The question is: Will the R & D process be able to differentiate between those products which have a benefit and those which do not?"
There are differences of opinion about what impact enhanced price consciousness in the market will have on the competitiveness of American companies against foreign manufacturers.
"The adoption of this type of prospective payment method for hospitals may substantially change the market for medical devices and may have implications for the international trade po- sition of U.S. manufacturers," says the OTA in its report "Federal Policy and the Medical Devices Industry."
The wide variety of medical technologies makes it hard to generalize, but the experience of other U.S. industries indicates that if medical device manufacturers lose their technological lead and are forced to compete solely on price, they will face tough times and tougher competition.
Market observers such as Fiorillo note that the U.S. has traditionally had the edge in developing practical medical applications of scientific discoveries.
West Germany, which has had many of the same health care cost problems as the United States, is one of the chief U.S. competitors in high-tech medical equipment. Currently, one third of all U.S. imports of medical devices come from West Germany.
However, the Japanese share of the American market is growing rapidly, increasing over 14 percent annually in the last five years. Japan now has one fifth of the U.S. import market.
While the U.S. may be one step ahead of the Japanese in technology, it has a harder time keeping pace on price. Although OTA's Wagner expects American companies to remain competitive, she notes that the Japanese in some areas, such as the CT scan, are more likely to produce the "work horse" technology rather than the most advanced equipment.
"Japan has filled in a demand for nice, inexpensive machines, such as those used in doctors' offices," she concludes. "These U.S. firms, who sell in hospitals, haven't geared their product lines to this new reality."
Fiorillo, however, does not see the Japanese taking over any time soon. "Our U.S. companies are technologically still way ahead," he says.
However, with the changing of traditional health care funding, the U.S. medical technology industry faces new challenges to maintain its solid growth. Just as foreign manufacturers of inexpensive cars made inroads into the American market a decade ago by responding to the need for more cost efficient autos, foreign medical technology producers may find they have an advantage in products they already produce more cheaply.
How the American medical industry will fare now that price competition is the name of the game remains to be seen.