TCS Daily


Gold for a Golden Era

By David Charles - July 8, 2002 12:00 AM

We are on the cusp of an era of healthcare discovery and innovation that will rival the information technology revolution of the past thirty years. In comparison to what the future portends, the dramatic advances we have witnessed in the diagnosis and treatment of patients with critical and chronic conditions during our lifetimes will be seem miniscule.

Today, researchers are working with mechanical limbs that receive input from the brain, implant able artificial hearts and tissue engineering capable of restoring human vocal cords. In less than a decade innovations like these could be readily available to the sick and injured.

To realize this golden era of medical innovation it will take more than dedicated scientists, it will also require some gold; gold in the form of continued venture capital investment. However, a recent study concluded: "A perceived increase in regulatory risk in recent years has influenced the investment decisions of venture capitalists to the extent that some are no longer willing to invest in the type of experimental technologies that have traditionally produced the greatest advancements in medicine."

This is not simply a business or economic issue. Venture capital is as essential to our health care system as prescription drugs or hospitals. It's no coincidence that the U.S. has both the world's best medical care and the most accessible capital markets. The foundation for America's global leadership in medical technology is built on venture capital funding of innovative scientists often working in start up companies.

Venture capital got the Salk vaccine started. It made open heart surgery possible. It gave us MRIs and heart pacemakers. More important, it's the genesis for medical innovations we haven't seen yet.

The disturbing trend in medical research today is that more and more venture capitalists don't want to take the risk of clearing the ever shifting regulatory hurdles imposed at the Food and Drug Administration (FDA) and the Center for Medicare and Medicaid Services (CMS). The more innovative the medical technology, the more regulatory uncertainty confronting venture capitalists seeking a return on their investment.

In short, venture capitalists are becoming less venturesome when it comes to health care investments. They are shying away from funding the most innovative research, which is also the research with greatest promise for breakthrough results. Instead, they are putting their money into less innovative ideas, perhaps variations on already accepted research because these ideas face a quicker path to regulatory approval.

All of this is confirmed when KPMG recently surveyed leading venture capitalists active in the medical sector. The consultants' mandate was to investigate how federal government policy and regulatory risks affect venture capital investing and innovation in medical technology.

The study's conclusions should sound an alarm for policy-makers who wonder from where the next round of medical technology innovation is coming. Interviewees told the KPMG researchers that, "regulatory burdens and uncertainties in the medical sector create an investment bias against the most novel, breakthrough technologies."

To the surprise of no clinical researcher, the venture capitalists interviewed by KPMG identified the FDA as a major source of unnecessary regulatory risk. The study cited the excessive time used by the agency to process applications for FDA approval, inconsistency in the approval requirements for similar products, changing of requirements during the approval process and the agency's inconsistent attitude towards industry.

In addition, the KPMG findings cited the FDA for an excessive emphasis on effectiveness considerations of proposed new technology as opposed to safety and questioned whether the agency has people qualified to evaluate product effectiveness.

Moving over to the CMS, the study reported that the long delays in processing reimbursement requests for new technology applications was a serious handicap for cash-starved early-stage companies. They also found that CMS created a great deal of uncertainty over future changes in reimbursement rates which, of course, created financial uncertainties for providers of new medical technology, especially entrepreneurial start-up operations.

Perhaps the most troubling symptom the study reported at the CMS was what the venture capitalists called an inherent bias by the agency against new technology when it came to approving Medicare reimbursement and approving reimbursement rates.

There is no quick answer to any of the problems cited in the survey. Recognizing the absolute necessity to keep venture capital flowing to early stage research in medical technology, though, the four recommendations of the venture capitalists deserve our attention:

  • Increase FDA responsiveness to new technology applications.

  • Create greater consistency in FDA requirements.

  • Allow the market to determine the effectiveness of new medical technology and let the FDA concentrate on safety.

  • Increase the flexibility of CMS reimbursement policy to reflect the reality that initial costs of new technologies tend to be higher than the long-term costs.


Researchers recognize the need for government to review the safety of a new medical technology before it's deployed. Now policy-makers must likewise understand the necessity for a regulatory regime that won't scare away the venture capital that is the lifeblood of medical innovation.

Dr. Charles is Director of the Movement Disorders Clinic at Vanderbilt University Medical Center and Chairman of the National Alliance of Medical Researchers and Teaching Physicians.
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