Medical Device Tax

The medical device tax is a 2.3% tax on medical devices, everything from bed pans to surgical tools.  It was signed into law as part of the Affordable Care Act, also known as Obamacare.  As I understand, the logic behind it was if more people are getting more care, more medical devices are being sold and therefore medical devices can pay some of the way.  This logic doesn't follow for drugs, whose companies have better lobbyists.

What is a company to do?  Assuming you are a public company and a certain margin is expected you can either pass the costs on to your customers or cut back on generally marketing and/or R&D (you could also cut quality, but I wouldn't recommend that).  I suspect if you're in the low margin bed pan business, you pass the costs on, you don't have a bunch of bed pan R&D to cut.  If you are the stent or some other product with higher margin, I suspect you also pass the costs on to your customers.  You have some brand leverage and a product you can differentiate yourself from the competitors so switching is more difficult.

Alternatively in either case you could just suck it up, maybe decrease your dividend and hope your investors are kind, but I'm telling you right now, CEOs are looking for ways to pass costs on to their customers.  That is their job, to look out for the company.  Passing the costs on to the customers defeats the whole purpose of the tax, lets look at the cutting R&D option as well.

The Incidental Economist has a post title the job killing medical device tax parts 1 and part 2.  He quotes a recent paper by Bryan Schmutz and Rex Santerre on the device tax and R&D, in part:

simulations show that the recently enacted excise tax on medical devices, taken alone, will reduce R&D spending by approximately $4 billion and thereby lead to a minimum loss of $20 billion worth of human life years over the first 10 years of its enactment.

So decreased R&D spending on medical devices reduces health care quality, which again defeats the purpose of the tax.

The incidental economist has seven points about the tax, none of which I entirely disagree with, however a one I think deserves comment.

One can be confident that the medical device industry will benefit tremendously from the large increase in the number of insured individuals to begin in 2014.

On this point, it depends on the device, some devices are presumably being used to treat the entire population that needs treated now.  These devices would typically be used in emergency cases.  For example, if you're having a heart attack, if you show up at the hospital, you'll get the treatment you need.  If there are people out there not getting treated, it is not because of insurance, more likely its due to access to medical care (i.e. they live in a place that can't deliver the needed treatment), or patient education (i.e. they think they'll be fine if they just wait it out).  More insured people won't increase device use here.  The devices most likely to be used more are the low margin ones, which are generally manufactured overseas.

In fact, a company could end up in a situation where the low margin products increase, the higher margin products don't increase, and you have a tax to deal with where you must cut R&D on high margin products, and/or pass the tax on to customers, neither of which was the purpose of the tax.

One of the comments brings up a good point about start ups:

This is a 2.3 percent tax on gross sales, right? If gross sales are $10, and profits are 10% or $1, then a 2.3 percent tax on gross sales wipes out roughly a quarter of the firm’s profits. For early stage companies with sales but with current operating losses, or negligible profits this could easily mean either paying taxes on losses or imposing losses on break-even revenues.

There are a decent number of companies with a few products and don't currently make a profit as they expand, they don't lose much either, but they are constantly on the edge.  It would be somewhat interesting to see how a company like Thoratec would have grown with this tax in place.  This makes it seem to me that a start up economics may change and a start up may try to sell itself or its products to a larger company sooner, as the transition from small to medium sized company is now harder.  This would result in the 10 or so large diversified companies that dominate the market continuing to do so.

All of this remains to be seen, and I'm trying to keep an open mind about it, but it doesn't make much sense to me right now.

FDA Drug Approval Rate Down

From FP:

...the number of new drug approvals has fallen dramatically. The FDA approved just 16 new drugs last year, and is on pace to approve only 18 this year. That's down from a high of 53 in 1996 and 39 in 1997.

I think FP nails it when they say: The US Food and Drug Administration (FDA) and similar agencies in other industrialized countries get politically punished more for approving drugs that turn out to have unexpected side effects. At the same time they few rewards for taking risks to approve drugs that might turn out to deliver large benefits.

It is unlikely that the FDA will change despite all of our wishing. It is much easier for medical devices than drugs to get approval, but the regulations are tightening, particularly in regards to software and devices which communicate with other devices, these are facing more scrutiny (still you know, now may be a good time to invest in medical device companies instead of drug companies- although I always think this). This scrutiny would be fine and good if it was deserved, but the EU has allowed these and other devices with less oversight and while the FDA has a few feathers in its cap about doing the right thing while the EU took excessive risks, I'm not sure it is warranted in most cases. On the bright side, things could be worse, it could be Japan.

Kid-Sized Medical Devices

Bad-Medical-Devices Blog asks Are Financial Incentives to Encourage Kid-Sized Medical Devices a Good Idea? I believe the answer for that is yes. The company I work at initially thought we would submit our device and a smaller one for pediatrics. The boss called the FDA and they indicated it would undergo extra scrutiny, so we nixed the smaller device and left any reference to pediatrics out of the initial filing, we don't need to go looking for more trouble initially.

Getting approval for pediatric use is now somewhere off in the future, probably forgotten for a few years. The development work required is pretty minimal- the design wouldn't take long at all and the validations would basically be repeats of what has already been done. But a pediatric device was never projected to be a big market to begin with, so other projects will get priority.

I think the blog article completely misses the point when it says:

The government should be offering financial incentives to device corporations who promise to increase scrutiny over manufacturing practices

We already have plenty of incentive to manufacture quality products, the regulations ensure that, I promise you, no medical device company wants a recall. What we don't have is incentive to go through lengthy approvals to chase small markets.

Reusing single use medical devices

Due to a WSJ article based on a GAO report, reusing single use medical devices, is a somewhat hot topic lately. Key phrase from the article is right here:

AMDR, the reprocessing group, is fighting efforts to require that patients go through formal informed-consent processes. Mr. Vukelich says informed consent is meant for experimental treatments and clinical trials, and not for devices that are legally marketed and approved by the FDA.

The sterilization of reprocessed is probably validated, but it doesn't sound like the performance of reprocessed devices is, I wonder what kind of traceability is required for these devices. I don't see how you can hold the device manufacturer responsible for any problems that come from a reprocessed device since it is basically an off label use. I'm not sure that is a good deal for about 50% off the cost of the devices listed, a saw blade or tourniquet is one thing, but an ultrasound catheter?

It should also be kept in mind that some of the high cost of these devices comes from the regulatory burden placed by the FDA on these products. Some of the cost savings of reprocessing come from letting the reprocesser skip some of these. Why not ease the regulatory burden on the original manufacturer if it is safe to do so? Maybe someone should make a saw blade labeled for zero-use, then reprocess it and see how the costs work out.

Update: A good article on the subject from Halifax Personal Injury Lawyer Blog.

US health insurance

Over at Overcoming Bias, they're talking about a RAND study "where from 1974 to 1982 the US government spent $50 million to randomly assign 7700 people in six US cities to three to five years each of either free or not free medicine, provided by the same set of doctors. The plan was to compare five measures of general health, and also 23 physiologic health measures."

Sound interesting? Read the two posts here and here.