Four Medtronic engineers and salesmen, frustrated with Earl Bakken’s cautious approach to technological innovation, left his company to manufacture a slimmer pacemaker also designed by Wilson Greatbatch but powered by a longer-lasting, hermetically sealed lithium battery. (The earlier models had mercury-zinc batteries, which released small amounts of hydrogen gas and lasted only a year or two before needing replacement.) The start-up, Cardiac Pacemakers, Inc., was financed with $50,000 in bank loans and $450,000 in venture capital. Its pacemaker was barely more than a prototype, and at first its salesmen had nothing to show doctors but a wooden mock-up. It had almost no sales in 1972, its first year.
Four years later, with health care now consuming 8.4 percent of GDP, and the average American life span creeping up toward seventy-three, Cardiac Pacemakers had $47 million in sales. “The profit margins were beautiful in those days,” said one of the company’s founders, Manuel Villafaña, a colorful former Medtronic salesman born in the South Bronx who’d earlier introduced Medtronic pacemakers to doctors in South America and Europe. Cardiac Pacemakers’ after-tax profits were 20 percent. Two years later, its founders sold the company to the Eli Lilly pharmaceutical company for $127 million. Renamed Guidant, it would later branch into coronary stents and other cardiac hardware and become the world’s third-largest manufacturer of cardiac-surgery devices—and would employ Katrina Bramstedt, who later became a bioethicist. In 2004, it was sold to Boston Scientific and Abbott Laboratories for $27.2 billion.
Spin-offs begat spin-offs. Manuel Villafaña left Cardiac Pacemakers to found St. Jude Medical, Inc., which developed and promoted a new heart valve made of stone-hard pyrolytic carbon, a major advance over the bulkier metal and plastic ball-and-ring models, prone to clotting, then being used by surgeons such as Dwight Harken at Peter Bent Brigham Hospital in Boston. The St. Jude valve became the most commonly used in the world; in one of its early years, after-tax profits hit 48 percent. St. Jude would use those accumulated profits a couple of decades later to buy a thriving international pacemaker company called Pacesetter, part of the German industrial and health behemoth Siemens, which had earlier swallowed Elema-Schönander, the Swedish company whose inventors saved Arne Larsson’s life.
The secret to success from the first was a guaranteed market and close-to-guaranteed prices. Unlike the tightly controlled, government-run variants of universal health care then being pioneered in many European countries, Medicare functioned more like a government-funded insurance company. Thanks to intense lobbying from the AMA, it was never given authority to negotiate bulk discounts, to request bids for standardized models, to second-guess a doctor’s decision, to control prices, or otherwise to interfere with what the AMA called the “doctor-patient relationship.” In the United States, a handful of pacemaker companies, enjoying a near monopoly, essentially set prices. Individual doctors decided independently who needed the devices and billed Medicare their “usual and customary” fees. Hospitals provided operating rooms and ancillary services, exercised little control over the doctors who used them, and billed Medicare separately. Medicare simply paid. Thanks to this unique financial structure—a griffin-like hybrid with neither the marketplace checks and balances of capitalism nor the top-down government controls of socialism—pacemakers and other emerging medical technologies were delivered practically cost-free to the hospital, surgeon, and patient. The system had no brakes.
As profits grew and sales forces expanded in Medical Alley, the thinking and practice of many cardiologists across the country changed. In its pioneering days, the pacemaker was regarded as a specialized lifesaver for a handful of otherwise healthy people with fatal disturbances in heart rhythm. After Medicare, as the devices improved technologically and inserting them became simple and profitable, the rationale changed. Doctors began inserting them to improve “quality of life” in a much larger pool of older people with minor heart arrhythmias. They next began inserting them on a “just in case” basis in relatively healthy people whose hearts were slowing down naturally with age but who had no symptoms at all. People like my father.