Innovation Under Siege from Potential Taxes

7 January 2010 (Last Updated January 7th, 2010 18:30)

The implementation of a new device tax under consideration in the US will not only impact patient access and jobs. It will have an adverse effect on innovation, too, as Thomas C Novelli reports.

Innovation Under Siege from Potential Taxes

It was only a few months ago that the US device industry's primary concerns with healthcare reform were focused on a few, select critical areas of competing legislative proposals such as transparency of payments to healthcare providers, comparative effectiveness research and payment reform.

These 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 United States Senate Committee on Finance threw a curve ball in the shape of a new proposal that included a "fee" on industry that is expected to raise a total of $40bn in revenue over ten years. While most of the proposals will be significant, the device tax is a game-changer.

The tax

Other Congressional committees of jurisdiction in both the House of Representatives and Senate have released and passed competing versions of a health reform bill, yet, it is the Senate Finance Committee's that is considered the most critical. That is because the body has very broad jurisdiction over many Federal government programmes, including all tax, trade and entitlement programmes, such as Medicare, Medicaid and Social Security. It is viewed as an "A" Congressional Committee. Most political experts predict the Senate Finance Committee bill will be the proposal most similar to what will eventually be passed by Congress.

Up until the Senate Finance Committee released its health reform legislation in early September, no other version of the various committee proposals – there have been five in total – included a "fee", which is just a nicer way of saying "tax", on the device industry.

The bill proposes to impose a "fee" on most manufacturers and importers of medical devices, which would be assessed proportionate to market share and on total revenue, not profitability. Most analysts estimate this would equate to an approximate 3.5% assessment on a company's total annual revenue. The fee would be assessed for all manufacturers of Class III devices and most Class II devices.

"The bill proposes to impose a "fee" on most manufacturers and importers of medical devices."

Class II products sold at retail with a value of $100 or less and all Class I products are exempted, and the fee would not be assessed for companies with revenue at $5m or lower. However, those with revenues of $5–25m would have a fee assessed on 50% of revenue, and any covered company with revenue of more than $25m would have the fee assessed on 100% of their revenue.

The House of Representatives liked the prospect of adding additional revenue to help pay for its health reform legislation, so when it passed its final legislation in November, it also included a tax on the industry, this time totalling $20bn over ten years. Its tax is to be assessed on most device companies regardless of annual revenue, have similar device class exemptions to the Senate Finance Committee bill, and would be implemented starting in 2013. In all, this version of the device fee will amount to a 2.5% annual tax on the industry.

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

Bad medicine

The concept of "shared responsibility" has continually been touted by Senator Max Baucus, a Democrat from Montana and chairman of the Senate Finance Committee, and other proponents of the tax as justification for implementing not only the device tax, but also a series of other taxes and cuts that will disproportionately affect a cross section of the healthcare industry.

The underlying premise of the concept is that the overall goal of healthcare reform, increasing health insurance coverage, will ultimately benefit healthcare industries. Thus, they must pay their fair share. While the idea of shared responsibility might have greater applicability for other areas affected by health reform legislation, it is more difficult to realise 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 is shaky at best.

"A more important underlying consequence of the device tax is that it targets an industry producing truly innovative medical technologies."

Many of the devices that will be affected by the tax are used in the acute care setting, where patients, regardless of insurance, usually receive the appropriate medical treatment. As a result, it is highly unlikely that a product such as a defibrillator, which would be taxable under the House and Senate proposals, would receive any sort of increased benefit from a larger pool of insured beneficiaries.

It is also not the case that more people will be going into cardiac arrest and will need the assistance of a defibrillator. With this in mind, the purchasing practices of hospitals are likely to remain unchanged. This scenario would apply to numerous other medical technologies as well.

A more important underlying consequence of the device tax, however, is that it targets an industry producing truly innovative medical technologies. It is also an industry that is one of the few with a positive economic growth, despite a most challenging economic environment. At a time when the Federal government is working to promote investment in US industries of the future, it is inconsistent that a tax of this magnitude would be considered.

The US is the global leader in medical devices, which is one of the few industries with a net trade surplus. In addition, the US medical technology industry is responsible for nearly two million jobs, including some of the highest paying manufacturing positions in the country. Furthermore, the medical device industry is made up of mainly of small businesses. In fact, more than 80% employ fewer than 50 people.

Additional challenges

An additional area worth noting in more detail is the proposed transparency measures included in the reform bill passed by the House of Representatives and contained within the Senate bill. In short, the legislation would require the disclosure of most payments made by drug and device manufacturers to physicians, surgeons, group purchasing organisations and other entities. The underlying goal would be for patients to have access to the types of relationships their healthcare professionals have with the drug and device industries.

While many in the industry believe the transparency initiative is positive, there remains concern regarding the actual implementation. Of foremost concern is that several states already have similar reporting requirements of drug and device companies, meaning that it might be possible that a firm would have to comply with not only a federal disclosure requirement, but potentially 50 state requirements too.

"While reform to the US healthcare system is much needed, the proposed device tax is an unfortunate and misguided policy."

What's next?

The device tax and other provisions such as payment transparency, comparative effectiveness research and payment reforms will change the face of the device industry in the US for years to come. While reform to the healthcare system in the US is much needed, the proposed device tax is an unfortunate and misguided policy objective that is nothing more than a "money grab".

To make the overall health reform bills more palatable, Congressional leaders and the White House want to target keeping the total cost of the bill under $1tr over ten years. But in order to achieve this, legislators have proposed to impose a series of taxes across multiple industries with little rational thought as to the consequences. The device industry is a victim of this target.

The House of Representatives passed its bill by only a two-vote margin in November. At the time of writing, the Senate has yet to release its final bill for debate, but all signs indicate it will still include a tax on the device industry.

If and once it is passed by the Senate, the two legislative bodies will need to mend the differences in the two bills and pass a final version before it can become law. However, whatever tax is imposed on the industry, it will pale in comparison to the greater impact on patient access, jobs, and innovation in the medical device industry.