But Dranovprofessor of strategy, admits that when he lectures on innovation, he has the nagging feeling that something important is missing from what he presents: innovation not of drugs but of medical procedures.
“I always think about the fact that everything we seem to know about medical innovation, at least from academic research, comes from drugs and biologics, with maybe only a little from medical devices,” he says. “And yet, when you look at some of the most important medical innovations, they are innovations in new medicine procedures”—such as open-heart surgery, joint replacement surgery, kidney dialysis, and various mental health treatments.
Although many researchers have investigated the motivations for drug innovation, far fewer have examined medical procedures. In fact, the entire process surrounding medical procedure innovation was a black box that Dranove realized he and his colleagues only vaguely understood.
So he decided to start a new research project to document how innovation and adoption of medical procedures happens, which he hoped would lay the foundation for his and others’ research in the area.
Dranove—along with the authors Craig GarthwaiteKellogg professor of strategy Christopher Heard, a former doctoral student at Kellogg, and Bingxiao Wu at Rutgers who earned her Ph.D. from Kellogg—address it in a new paper.
The researchers’ research quickly led them to the central role played by an administrative procedure: the assignment of CPT (“current procedural terminology”) codes to various procedures.
“If you think about anything that doctors do that doesn’t prescribe a drug, it’s a procedure—and they don’t get paid for it unless they have a CPT code that they can assign to it,” Dranove explains.
Notably, this administrative business is not controlled by the government but by the American Medical Association, which owns the copyright to the CPT codes. This means that it is up to the AMA to assign new CPT codes to innovative medical procedures. This includes temporary status or class III CPT codes, which many insurers do not reimburse, as well as full reimbursement status or class I CPT codes, which insurers almost always reimburse.
Dranove notes that the wait time for temporary CPT codes is comparable to the timeline for new drugs seeking FDA approval—but that the process for medical procedures comes with more uncertainty and less transparency since it is controlled by the AMA.
“Who is the AMA accountable to? Do they have the right motivations?’ Dranove asks. “I don’t want to say that their process is wrong. I mean it hasn’t gone through the same scrutiny as the FDA process for drugs.”
Shining a light on CPT code generation
Dranove enlisted the help of some of his MBA students to identify the most important data sources for medical innovation—and they were the ones who explained the importance of the American Medical Association’s CPT code list.
Dranove was struck by how little he knew about the AMA process and called the organization to ask if he and co-author Wu could visit to learn more about it. The AMA agreed and also gave researchers unrestricted access to all relevant meeting minutes and CPT code applications filed between 2008 and 2017.
The data allowed researchers to plan the development process for new procedures and establish timelines—from initial research into a new procedure, FDA approval of any related medical devices, AMA approval of temporary CPT III codes to, finally , promotion to permanent CPT I codes if there is sufficient evidence of procedure effectiveness.
The researchers also pulled Medicare payment data between 2012 and 2018, which gave them visibility into the procedures provided to Medicare beneficiaries during that time. This allowed them to track the extent to which a procedure’s adoption rate changed after being granted CPT I status.
Disentanglement motivations
The researchers found that between 2008 and 2017, only 29 percent of new procedures were promoted from CPT III to CPT I, or the fully reimbursable category.
In addition, they estimate that it took an average of 10 years to go from the initial research phase to obtaining CPT III — and over 16 years to reach CPT I. And this promotion was significant: Transition from CPT III to CPT I caused a nearly ninefold increase in the use of a procedure by Medicare patients.
The result: obtaining CPT I status is highly cost-effective—and, as the researchers write, “the significant lag between promotion from Class III CPT codes to Class I CPT codes represents a significant financial cost to innovators.” This is largely because some procedures require a newly patented medical device, so the lag time may overlap with the device’s early market exclusivity periods.
Why was the percentage of procedures upgraded to CPT I status so small? Dranove acknowledges that it’s unclear from this study — and that he hopes other researchers will address the question. It’s possible, he explains, that procedures that never move to a CPT I code simply don’t have the excitement surrounding them to get there, perhaps because they don’t represent a significant improvement over already available procedures.
Alternatively, it is possible that these procedures are effective and that physicians would like to see them promoted to a CPT I code, but the current AMA process is such a barrier that it is not worth the effort in many cases to proceed.
This alternative theory is rooted in the fact that, unlike people who innovate new drugs, innovators of new medical procedures retain virtually no intellectual property rights in their discoveries. (The AMA has pushed for legislation to ban procedure patents, and the Council on Ethical and Judicial Affairs has called for the “open exchange of information without expectation of financial reward for the advancement of medical science.”)
“Incentives for adopting a new process are spread across a large number of stakeholders,” explains Dranove. He adds that, in terms of trying to research and promote a process for assigning CPT codes, “there’s a problem with free riders: everyone would like to see a procedure approved, but no one is motivated to get it approved. »
The researchers observed a trend consistent with this theory: most often, medical companies were the ones to submit applications to the AMA for new medical procedures, especially when the procedures involved nonproprietary devices or no devices at all. On the other hand, companies were more likely to apply for CPT codes when the new procedures required a proprietary patented device—suggesting that they were motivated by a financial incentive.
Process Improvement
During the process of approving CPT codes for medical procedures, the AMA necessarily makes many choices, Dranove points out. Among them: How much evidence should they require to support the effectiveness of a process? What should these elements look like?
“These decisions have not been subject to public scrutiny,” says Dranove. “And yet, given the importance of medical procedures and how they affect our lives, we question whether this is the right way.”
The researchers recommend two key changes to the AMA process: First, they believe the AMA should allow special designations for procedures that address unmet need to speed up the approval process in those cases. Second, they suggest that a government agency like the Centers for Medicare and Medicaid could take over the coding process. Dranove points to a potential obstacle here, in that “the largest single source of revenue for the AMA comes from their copyright on the CPT codes.”
In Dranove’s mind, the most meaningful change might simply be greater involvement of innovators in the process of creating new CPT codes.
“The AMA could work with applicants and say, ‘If you present this data, we’ll approve this thing,'” says Dranove. He adds that the FDA’s process for approving drugs was initially very similar to AMA on Processes Today After years of process reform, however, every drug company now works with someone at the FDA on an ongoing basis to talk about the quality of their data and what the approval process will require.
“In my opinion, that would be the most important thing—for the AMA to be more proactive in working with innovators,” says Dranove.
