The device industry is one of the most profitable in America, racking up an estimated $40 billion in earnings on $130 billion in sales last year. Like the drug industry, it usually devotes from 15 to 20 percent of each year’s sales to research and development.But unlike the pharmaceuticals, the industry is not dependent on patent-driven marketing exclusivity to generate its hefty margins. Rather, many of its best-selling products are minor variations of earlier products, which can be sold at higher prices because the companies claim they are substantially better than earlier versions. The companies rarely conduct clinical trials to prove those assertions.
The industry also benefits from an opaque pricing structure, making it almost impossible for economists to determine who actually pays the tax. Many hospitals, which are the primary purchasers of implanted medical devices, are required to sign non-disclosure pricing agreements with medical device companies if they want to get discounts from the published list price. Unable to compare prices, hospital administrators have no idea how their final prices compare to hospitals across town or across the country.
The companies also forge close ties with the surgeons who insert their products, which can include lucrative consulting arrangements. Because hospitals are dependent on independent surgical practices to bring patients in to fill their beds, they have little say over what device brands get used in their hospitals and thus have little bargaining power in their negotiations with the device companies.
Last month, Premier Inc., which serves as a group purchasing organization for about 2,500 hospitals systems in the U.S., asked the Internal Revenue Service to monitor device industry pricing practices next year to ensure they don’t pass along the 2.3 percent levy to hospitals. “At the very least, manufacturers (should) certify that they have not included the tax in the price of their products,” Premier officials wrote to the agency.
Democratic opponents of the bill did not challenge the claims that the tax would undermine innovation. They focused instead on the Republican offset, which raised $29 billion by clawing back reform’s health insurance subsidies to low-income people if their incomes rise during the first year they have subsidized coverage. Democrats estimated about 350,000 people would not buy coverage because of the clawback.
The tax “was the (device industry’s) contribution to health care reform,” said Rep. Pete Stark, D-Cal. “This bill takes that money out of the hands of low and moderate-income families and gives it to rich companies.”
The repeal was coupled with other revisions to the nation’s health care laws. One would let people use money from some tax-advantaged health savings accounts for over-the-counter drugs. The overall bill would cost $37 billion over 10 years.
The Senate Democratic leadership has said the upper chamber will not consider the bill. But Minnesota’s two Democratic Senators, Al Franken and Amy Klobuchar, are working behind the scenes to find a substitute offset provision so the tax can be repealed. Medtronic, the nation’s largest medical device maker, is headquartered in Minneapolis.