Article preview from IN VIVO - March/April, 2010
The tax on medical devices was a late addition to the health reform legislation but it quickly became the industry's focal point over concerns that, in an already difficult environment, this added burden could threaten to disrupt the traditional device innovation model.
Health Care Reform: Further Taxing The Device Innovation Model
Article preview from IN VIVO - March/April, 2010
The tax on medical devices was a relatively late addition to the health reform legislation but it quickly became the industry's focal point over concerns that, in an already difficult environment, this added burden could threaten to disrupt the traditional device innovation model.
** When the health care reform debate first began last year, the device industry was primarily concerned with issues such as comparative effectiveness research and regulating relationships between product companies and physicians.
** The industry's focus quickly shifted, however, with the introduction of a proposal that would tax medical devices in an effort to generate what was initially set at $40 billion to help finance health care reform.
** Industry advocacy organizations initially differed in their strategies but eventually came together to oppose the tax. Those efforts failed, however, to prevent the measure from being included in the final legislation.
For many constituencies within the US health care industry, the debate over health care reform (HCR) was fraught with major concerns regarding the legislation's potential impact on their respective businesses from the time that President Obama and Democratic Congressional leaders first introduced legislation in the spring of last year. Insurance companies, doctors, drug companies, and hospitals all had serious misgivings about how a variety of significant provisions that looked to be included in this bill would impact their respective businesses.
All the while, the medical device industry was cautiously optimistic, holding its collective breath as it appeared initially that it might avoid taking any major direct hits. Sure there were proposals that would impact the industry directly—most notably comparative effectiveness research (CER) and provisions regulating industry payments to physicians (the so-called Physician Payment Sunshine Act), and still others that would indirectly affect device companies—such as provider payment cuts and movement towards Medicare payment reforms —but these were changes that the industry could largely live with and, in the case of CER and the sunshine legislation, had actually come to support.
As the debate moved into the late spring and early summer, the discussion became more heated and the device industry was faced with a crucial strategic choice: either continue to lay low and hope to stay off the radar screens of Congressional leaders looking for all possible revenue sources to fund the HCR legislation, or to step up and become a more active player in the debate to represent and protect the industry's interests as the legislative process progressed. The industry's two Washington, DC-based advocacy organizations actually came down differently on which path the industry should take, with AdvaMed eventually agreeing to a medical device tax with the goal of influencing the structure of the tax, while the Medical Device Manufacturers Association (MDMA), whose members are largely small to mid-sized companies, maintained steadfast opposition to the tax.
AdvaMed's decision conforms with conventional wisdom regarding influencing the debate in Washington. Paul LaViolette, now a venture partner with SVLSA (formerly Schroder Ventures Life Sciences) and formerly COO of Boston Scientific Corp., where he was among the industry leaders in many political battles, observes that when it comes to having a say in what comes out of Washington, "If you're not at the table, you're on the menu." The result dramatically increased the industry's visibility, including having then-AdvaMed Chairman, Michael Mussallem, CEO of Edwards Lifesciences Corp., pictured prominently with President Obama and other health care industry leaders on May 11, 2009, at a White House meeting to discuss reducing health care costs.
By the end of the summer, however, the other shoe dropped. Perhaps driven by the offer from PhRMA, the drug industry trade association, to contribute $80 billion to the cost of reform, Congressional leaders, led by Senate Finance Committee Chairman, Sen. Max Baucus (D-MT), looked to the device industry to pay its share. That amount was originally deemed to be $40 billion over ten years in the form of an annual fee levied on device companies. The figure surprised many in the industry as being out of line with the relative sizes of the drug and device industries. Nonetheless, for a Congress desperately looking for all sources of revenue to fund the reform effort, once the idea of a device tax surfaced, the question no longer was whether the industry would bear some of the cost of this legislation, but rather a question of how much.
Indeed, the final legislation included a device tax, albeit one that the industry and its Washington representatives successfully convinced Congress to reduce to roughly half the amount of the levy that was originally proposed. But in the course of several months in the middle of last year, the impact of health care reform legislation on the device industry shifted dramatically, presenting the most dramatic changes the industry has seen since the Medical Device Amendments of 1976. By imposing the device tax, instead of moderate changes in the health care system that the industry was coming to terms with, the new law poses a major challenge that directly targets device companies' bottom lines across the board, without regard for company size or profitability. Industry's biggest concern: coming at a time when the overall climate—economic, investment and regulatory—is already presenting significant barriers to industry growth, start-up company creation, and technology innovation, could the device tax tip the balance and upset the traditional innovation model that has fueled the device industry's growth?
- Stephen Levin
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Companies mentioned in this article
Abbott Laboratories Inc.
Boston Scientific Corp.
Cooper Companies Inc.
Edwards Lifesciences Corp.
Harvard University
Johnson & Johnson
Medtronic Inc.
NuVasive Inc.
Wright Medical Group Inc.
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