To the layperson, the term "medical devices" may conjure images of gleaming machines, packed with the latest in technology, helping doctors and others to diagnose and treat medical conditions and save lives.
The reality, as with much about the healthcare system, is more complex.
That point was made clear in the case discussion, "Heartport, Inc.," that made up the device portion of the Alumni Healthcare Conference.
The discussion, led by HBS professor Richard Bohmer (with Heartport CEO Casey Tansey on hand), focused on Heartport's efforts to introduce innovative systems for performing cardiac surgery without the need to crack open the patient's breastbone.
The company's Port-Access technology allows surgeons to operate on the heart through small keyholes, or ports, between the ribs. This application of the concept of minimally invasive surgery to cardiac procedures led to a well-received initial public offering (IPO) in April 1996.
One analyst at the time called Heartport "one of very few newly public companies in the medical device industry with the potential to become a truly large, independent entity."
But it didn't happen. When Tansey became CEO in September 1999, the time highlighted in the case, Heartport had been through two major downsizings, and its stock had fallen to a new low. The new chief executive was faced with turning the company around in a changing market with new, strong competitors.
"How did Heartport get in this mess?", asked Bohmer. "In 1996, it was the biggest-deal medical device IPO. This was going to reawaken the medical device market, which had been dormant for a while. The analysts thought this was the greatest thing since sliced bread. Initial analysts reports were talking about 20-50% of the market of 350,000 CABGs [coronary artery bypass grafts] a year. How did they get in this mess?"
Beyond technology and product development
The answers that emerged from the case—and from the classroom discussion—help highlight the complexity, beyond technology and product development, of the medical device market.
One key issue was the learning curve. "The Heartport technology is difficult," said Ronald Weinberg (HBS AMP 149), a cardiac surgeon at Beth Israel Deaconess Medical Center in Boston. "It initially is going to have a high complexity rate and a steep learning curve. Surgeons, although we are being marketed by our patients to go to less invasive stuff, are basically very conservative."
Tansey agreed. Surgeons, he said, are "a technique-oriented group that exists because of technique. They learn how to operate with their hands. They have virtually no technology.
"The only technology they use is the industry I came from, which is heart valves. They're interested in heart valves, but beyond that, they operate with their hands." Transforming cardiac surgery from a technique to a technology, he said, was a big challenge.
Besides, added Bohmer, "Performance of this technology is not just dependent on the behavior of the surgeon. It's dependent on the behavior of the whole surgical team going right on through rehab. And I don't know many hospital administrators who are really good at managing process change across the whole breadth of that process so that you could realize real live benefit from this technology."
"Our costs of training were enormous," noted Tansey. "It costs us about $60,000 a team to train these teams, and it was a cross-functional training. You had anesthesiologists, surgeons, profusionists, administrators, cardiologists. It was an enormous undertaking."
Economics of the operating room
The economics of the operating room also came into play. Although the time needed to perform Port-Access surgery varied, it often took considerably longer than conventional surgery. "At hospitals where surgeons and anesthesiologists were paid on a per-case basis, rather than being salaried, the extra time required to do Heartport cases meant fewer cases and thus lower income," reported the case.
"Part of the problem," said Michael Kaswan (HBS MBA '97), "is, overall, it may have economic benefit, but it does not benefit the surgeon, it costs the surgeon a lot, and he's got a lot of power.
"Even if at a hospital you could theoretically realize the cost benefits, you're dealing with the cardiac surgeons who have, probably, the most power of any doctor in the hospital," said Kaswan, vice president of KBL Healthcare Ventures. "Unless you find a way that there's, at least, no impact on the surgeon due to this procedure ... you're never going to get there."
The combination of economics and a steep learning curve led to a conundrum for Heartport: the ability to perform Port-Access surgery more quickly depended in part on more surgeons and surgical teams performing the procedure more often; but as long as it took longer than conventional surgery, it was difficult to get more surgeons to consider Port-Access as an option.
Also complicating matters was the often tenuous relationship between cardiac surgeons and cardiologists. Surgeons had to rely on cardiologists for referrals, often at the expense of nonsurgical procedures that the cardiologists could perform themselves.
There would have been a better chance of success, said Les Zendle (HBS AMP 151), associate medical director at Kaiser Permanente-Southern California, "if you had a system that was integrated, where there wasn't the incentive for the cardiologist to keep that patient and incentive for the cardiac surgeon to do enough [Port-Access procedures] to become proficient.
"In the current system, it's very siloed, and that's a problem."
KBL's Kaswan said Heartport's strategy might have dealt with these issues better by more careful targeting of medical institutions and teams. "Clearly it's not economically viable for a lot of surgeons to do this," he said, "and it's hard to do, and there's a big training curve. So I would focus on the segments where the economics are not lined against you, which includes salaried physicians and academics, and on people who have done a lot of these and know how to do it, and on getting people to that point."
Blurring lines
Other issues raised in the case discussion included marketing strategy and Heartport's choice between two alternate routes to clearance from the Food and Drug Administration (FDA) for commercial sales of the new technology. All of them pointed toward important lessons for the medical device industry, said Bohmer.
"I think this is an important case for us," he said, "because it is really typical of the device world in this blurring between what's a product and what's a process. How do you capture value from a process, even when you have patents on a product?
"The benefit, the efficacy of the therapy is as much in the hands of the delivery team as it is in the actual product itself," he continued, and that calls for "a whole different strategy for technology rollout."
Tansey said that Heartport, which has broadened its product strategy since 1999, is still convinced that "the market's potential is huge. It's a market development story. Ultimately, this will have a market, for Heartport or somebody else. Minimally invasive surgery will be the way it is done."
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