Medical Devices

Archive for June, 2010

Beginning in 2013, manufacturers will be assessed a 2.3% excise tax on sales of medical devices.  This is expected to generate tax revenues of $20 billion over 10 years.  This does not include export sales or sales of devices purchased by the public at retail.  The excise tax is tax deductible, making the effective tax impact about 1.5%.  The tax is based on revenues, not profits, therefore the lower the profit margins, the greater the impact.  Large companies such as Baxter, Abbott and J&J may see an impact on profits of 0.5% - 1.0%, while others such as Boston Scientific, CareFusion and Nuvasive may be impacted from 5.0% - 10.0%. 

Companies which may benefit (and/or see less of an impact) are those who offer unique or proprietary products with innovative enhancements.  This will allow the manufacturers to maintain or raise pricing and profit margins. Also, manufacturers who offer cost effective products or products paid for directly by consumers will benefit.  The trend for home-healthcare products will continue to rise, as this will eliminate repeated visits to hospitals or other providers. 

Companies which may be more adversely affected are those who offer commodity-type, expensive and undifferentiated products, with marginal innovations or unproven outcomes.  

Another key issue with the new healthcare reform legislation is that beginning in 2014, when everybody is required to be insured (or pay a penalty), this will add approximately 32 million people to insurance plans (by 2019).  Approximately 12-15 million of this number will be added to Medicaid.  Beginning in 2011 the insurance companies, including HMO’s and Medicare/Medicaid are looking to tighten the minimum medical cost ratios (MCRs).  This equation = medical expenses/premiums.  Insurers are likely to wield more power in rates and reimbursement negotiations with hospitals and physicians.  The trickle down effects will be seen on device manufacturers, who will be pressured to lower costs, and furthermore on vendors for component or manufacturing costs.  Hospitals and physician groups are more likely to form larger, integrated networks to try and fend off pressure from insurers.

The legislation appears to be more “coverage reform” than true policy reform; it does not address costs or delivery of care.  One can expect healthcare costs to continue to rise.  How this ultimately affects device manufacturers is yet to be determined.  Cost cutting or containment will be crucial; extensive cuts in R&D spending will likely dampen innovation.

According to the Lewin report, which was prepared for Advamed and presented to congress, in 2008 the medical technology industry employed over 420,00 workers, generated $42 billion in payroll and sold $135.9 billion in products. Each Medtech job generates an additional 1.5 jobs.  From 2005-2008 medtech jobs increased by 12.5%, payroll increased by 11.4%, and product sales increased by 11.6%.  On average, medtech salaries are $16,000 more than the national average earnings.  Top 3 employment states are California (84,000), Minnesota (26,900) and Massachusetts (23,900).  Connecticut has approximately 7,600 medtech jobs, 19th highest in the country.  Connecticut is one of only 7 states where the medtech salary average ($51,666) is less than the state average ($52,922). 

While not immune to the recent global economic downturn, the impact on the medical device industry has been significantly less than on U.S. manufacturing on the whole. The Lewin report shows that from 2007 to 2008:

•        Total U.S. manufacturing employment decreased by 4.8%

•        Medical technology employment decreased by only 1.1%

•        Total U.S. manufacturing payroll decreased 1.4%

•        Medical technology payroll decreased only 0.7%

•        Total U.S. product sales increased 2.8%

•        Medical technology sales increased 3.0%

As of March 31, 2013 all drug, device and biotech manufacturers must report annually on payments or transfers of value to physicians or teaching hospitals.  This includes consulting fees, gifts, entertainment and travel expenses, education, research, royalties, charitable contributions and grants.  These were known in the past as “sunshine payments”  Advamed and other industry organizations have published code of conduct guidelines for manufacturers, physicians and hospitals on how to comply.   

Other federal legislative initiatives under consideration include:

•        a strategy to improve the delivery and quality of care

•        the development of an independent payment advisory board appointed by the President; they are charged with developing proposals to reduce Medicare costs.

•        Development of Outcomes Research Institute including representatives from AHRQ, NIH, and drug, device and diagnostic manufacturers.  They are charged with research of outcomes to assess clinical effectiveness, risks and benefits of treatments, service or items. 

•        Medicare Delivery Systems Reforms.

•        Center for Medicare and Medicaid Innovation. 

•        Bundling Pilot Program which would propose a single payment for bundle of services around hospital stays.

•        A reduction/ penalty of 1.0% for reimbursement of all DRG’s to hospitals in top quartile in rates of hospital acquired infections.

•        Value based purchasing for DRG payments.