On the Hill

Innovation Under Siege

Thomas Novelli

It was only a few months ago when the primary healthcare reform concerns of the United States device industry were reserved to a few, select critical areas of competing legislative proposals. Issues ranging from transparency of industry payments to healthcare providers, comparative effectiveness research and payment reform were thought to be the proposals most likely to affect the device industry over the course of the next decade.

However, in September 2009, the industry was thrown a curve ball when a healthcare reform proposal generated by the U.S. Senate Committee on Finance included a $40 billion “fee” on the industry.

While most of the proposals targeting the device industry will be significant, the device tax is a game-changer.

Sen. Max Baucus (D-Mont.), chairman of the committee, released his version of the bill in September. Most political experts predicted that the committee’s bill would be the proposal most similar to what eventually would be passed by Congress. Other congressional committees of jurisdiction in both the U.S. House of Representatives and U.S. Senate had released and passed competing versions of a health reform bill. Yet, the U.S. Senate Committee on Finance continues to be viewed as the most critical.

The committee has broad jurisdiction over many federal government programs. Considered an “A” congressional committee and one of the most coveted by senators, it has jurisdiction over all tax, trade and entitlement programs, including Medicare, Medicaid and Social Security. It also historically is noted as one of the more bipartisan committees in Congress.

Baucus and ranking member Sen. Charles Grassley (R-Iowa), who interchangeably have been head of the committee since 2001, take pride in working together and crossing party lines to reach rational agreements. For instance, in 2003, Baucus, then ranking member, joined Grassley, then chairman, to pass the Medicare Modernization Act of 2003, which created a new drug benefit for Medicare beneficiaries. Conversely, Grassley joined Baucus and Democrats in passing the expansion of the Children’s Health Insurance Program in 2008. Both of these votes were against the will of their respective parties.

The Tax

Until the U.S. Senate Committee on Finance released its health reform legislation in early September, no other version of the various committee proposals included a “fee” on the device industry. In total, there were five versions of health reform legislation being considered. The House of Representatives, which passed a final version of their bill in November, was the product of bills from three committees: Ways and Means, Education and Labor, and Energy and Commerce. These committees have jurisdiction over some of the provisions of the final bill. In the Senate, the other committee with jurisdiction is Health, Education, Labor and Pensions (HELP). The HELP Committee passed its bill last summer. None of these committee proposals included a device industry fee.

Not to be outdone, the U.S. Senate Committee on Finance bill proposed to assess a “fee” on most manufacturers and importers of medical devices. The total amount of revenue it is expected to raise would be $40 billion over 10 years, or approximately $4 billion annually. The fee would be assessed proportionate to market share and on total revenue, not profitability. Most analysts estimate that this would equate to an approximate 3.5 percent assessment on a company’s total annual revenue.

The proposed fee would be assessed for all manufacturers of all Class III and most Class II devices. Exempted from the fee are Class II products sold at retail with a value of $100 or less and all Class I products. In addition, the proposal scantly carves out exceptions for small companies. Specifically, the fee would not be assessed for companies with revenue at $5 million or less. However, companies with revenues between $5 million and $25 would have a fee assessed on 50 percent of revenue, and any covered company with revenue more than $25 million would have the fee assessed on 100 percent of its revenue.

The U.S. Senate Committee on Finance passed its bill in October by a razor-thin margin. Most members of the committee, including all Republicans and some Democrats, either sought to eliminate the fee outright or at least publically expressed concern about the proposal. However, the fee remained after the final vote.

The House of Representatives liked the prospects of adding additional revenue to help pay for its health reform legislation. When the House passed its final legislation in November, it also included a fee on the industry totaling $20 billion over 10 years. The fee is to be assessed on most device companies regardless of annual revenue, have similar device class exemptions to the U.S. Senate Committee on Finance bill and would be implemented in 2013. In all, the House device fee will amount to a 2.5 percent annual tax on the industry.

In short, “fee” was a nicer way of saying “tax.”  More importantly for proponents of the health reform bill, they like the idea that the device tax seemingly would keep the overall price tag of health reform under $1 trillion.

Bad Medicine

The concept of “shared responsibility” continually has been touted by Baucus and other proponents of the tax as justification for assessing not only the device tax, but also a series of other taxes and cuts that would disproportionately affect a cross section of the healthcare industry.

The underlying premise of the shared responsibility concept is that the overall ends of healthcare reform, increasing health insurance coverage, ultimately would benefit healthcare industries. Thus, the healthcare industry must pay its fair share because it will benefit in the longer term. While the shared responsibility concept may have greater applicability for other industries affected by health reform legislation, it is more difficult to realize for the device industry.

A consistent argument used by supporters of the tax is that when there is an increased pool of newly insured beneficiaries, device companies will benefit from having an expanded customer and user base. However, this argument remains shaky at best. Many of the devices that will be affected by the tax are used in the acute care setting, and patients, regardless of insurance, usually will receive the appropriate medical treatment.

For instance, under both the House and Senate proposals, an acute-care-setting product, such as a defibrillator, would be captured under the definition of a taxable medical device. It is highly unlikely that a product such as a defibrillator would receive any sort of increased benefit from a larger pool of insured beneficiaries. Uninsured people will more likely than not receive some form of appropriate medical care in an emergency medical situation. It would not be the case that more people would go into cardiac arrest and need the assistance of a defibrillator. People get the treatment regardless of insurance status. With this in mind, it’s not likely to affect the purchasing practices of hospitals since many uninsured already receive some form of medical care. This scenario would apply to numerous other medical technologies as well.

The more important underlying impact of the device tax is that it is a target on a truly innovative industry producing innovative medical technologies. It also is one of the few industries that shows positive economic growth, even in the most challenging of economic times. At a time when the federal government is working to promote investment in U.S. industries of the future, it is inconsistent that a tax of this magnitude would be considered. Currently, the United States is the global leader in medical devices, and the industry is one of the few with a net trade surplus. In addition, the U.S. medical technology industry is responsible for nearly 2 million jobs, including some of the highest paying manufacturing jobs in the country. Furthermore, the medical device industry mainly comprises small businesses. In fact, more than 80 percent of medical device companies employ fewer than 50 people.

What’s Next?

The idea to propose a tax on the medical device industry was nothing more than a “money grab.” To make the overall health reform bills more palatable, congressional leaders and the White House wanted to keep the total cost of the bill under $1 trillion over 10 years. In order to achieve this, legislators have proposed to impose a series of taxes across multiple industries with little rationale thought as to the consequences of such proposals. The device industry is one such victim of these targets.

Both the House and Senate passed their respective bills toward the end of 2009. While the bills differed slightly in their approach to the device tax and other device provisions, lawmakers currently are examining how to best reconcile the two bills in order to achieve their goals for healthcare reform.

The Medical Device Manufacturers Association (MDMA) continues to oppose the proposed medical device tax. It will harm patient access and innovation by small, innovative medical technology companies. MDMA continues to reach out to congressional leaders to educate them about the devastating impact the tax will have upon the industry, including the impact on jobs, research and development and the ability of promising new medical technologies to reach the marketplace.

Editor’s Note: On Jan. 19, Scott Brown was elected as U.S. senator from Massachusetts—the commonwealth’s first Republican senator since 1972—filling the seat left vacant by the death of Sen. Edward Kennedy. Scott’s election takes away the Democrats’ filibuster-proof majority and significantly changes the healthcare reform debate and legislation currently being discussed on Capitol Hill. As of press time, it is unclear how healthcare reform would proceed and, as result, how the device tax would be affected.

Thomas C. Novelli is director of Federal Affairs for the Medical Device Manufacturers Association in Washington, D.C. From 2003 to 2007, he served on the Senate Committee on Finance, where he worked on several areas directly affecting the medical device and pharmaceutical industries, including reimbursement, drug and device safety and approval, and fraud and abuse in the Medicare and Medicaid programs. Novelli received his undergraduate degree in political science from the University of Dayton in Ohio, and a Master of Arts in policy from the Catholic University of America in Washington, D.C.