Healthcare reform may have major impact on medical device industry

Thomas Novelli

The environment for innovation is about to significantly change for manufacturers of medical devices.

In March 2010, President Barack Obama signed into law the most sweeping reform of healthcare since the creation of the Medicare and Medicaid programs. As a result, insurance coverage will be available to more than 32 million Americans and significant regulatory reforms will be mandated for current insurance systems.

The new law also will cut more than $500 billion from the Medicare program and raise additional taxes by approximately $440 billion, including a new tax on medical device manufacturers.

Healthcare reform means medical device manufacturers will face significant changes moving forward. Most notably, device companies will face a new 2.3% excise tax beginning in 2013. The tax was slightly scaled back at the eleventh hour from 2.9%. This occurred after a decision was made to not exempt the majority of Class I products. A few exceptions did remain in place, including eyeglasses, contact lenses, hearing aids and other products sold at retail establishments. In addition, because the tax is structured as an excise tax, it will be deductible.

Industry will push to repeal tax

While the tax itself is troubling for the industry, there is an added concern that there is no exemption for small medical device companies, which comprise the majority of the industry. Several amendments were discussed early in the process that would have exempted companies with annual revenue under $100 million from the tax. In addition, companies with revenue between $100-150 million would have the tax assessed on only 50% of revenue. However, as the process developed and Congressional leaders and the White House wanted to move forward quickly with a bill, negotiations with stakeholders became nonexistent.

The negative impact on device companies, and the innovation process, could be significant. Many small- to mid-size companies have razor-thin profitability margins. They may have to make difficult decisions in the near term, including reducing the workforce, limiting research and development, or delaying profitability. The industry, including the Medical Device Manufacturers Association, will continue to push for a repeal of the tax before it becomes effective.

New requirement to report payments

The new healthcare reform law also includes other provisions that will impact the medical device industry. New transparency requirements included in the law will mandate that medical device and pharmaceutical manufacturers disclose most payments made to physicians and teaching hospitals.

Specifically, device manufacturers participating in Medicare, Medicaid or other federal healthcare programs, will need to report to the Department of Health and Human Services (HHS) any payments made to a physician or teaching hospital that exceed $10 per payment, or $100 in the aggregate. Company payments would then be posted on a HHS website, available for the public to search.

There is some accommodation for payments made to physicians for products under development. Specifically, these payments would not have to be reported until either the product is cleared or approved by the Food and Drug Administration, or four years after the payment is actually made. The new reporting requirement goes into effect beginning in 2013 for payments made in 2012.

Two new entities will be created

Other significant areas of the health reform law include the creation of an Independent Payment Advisory Board, which can ultimately cut spending for specific items and services in Medicare without Congressional approval, and a new comparative effectiveness research center.

The impact on the industry of these two new entities is yet to be told. However, their decisions could affect reimbursement rates for device-dependent surgical procedures in the future.

Ultimately, medical device manufacturers, and in particular small companies, should be concerned about the resulting impact of this legislation. The tax could threaten the nation's position in the world as leader in the development and innovation of breakthrough medical technologies.

Thomas Novelli is Director of Federal Affairs for the Medical Device Manufacturers Association. He can be reached at tnovelli@medicaldevices.org.