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Device firms complain about jobs to keep attention away from great margins, opaque pricing

June 17, 2012 11:47 pm by | 0 Comments

Ignoring threats of a presidential veto, House Republicans earlier this month repealed the medical device tax included in the 2010 health care reform law to help pay for coverage of the uninsured. A handful of Democratic representatives with major device makers in their states also supported repeal, which passed 270-146.

Opponents of the 2.3 percent tax, which is slated to raise $29 billion over the next decade, argued the minor levy would slow innovation in the medical device field and cost jobs. During the debate over health care reform, device makers, like their counterparts in the pharmaceutical industry, had agreed with reform proponents’ arguments that 30 million new paying customers would more than offset any tax losses or fees contained in the bill.

But now the hundreds of companies that make everything from tiny syringes to giant CT scanning machines have gone back on that pledge. The best known firms, headquartered in Midwestern states like Minnesota, Indiana, Ohio and Pennsylvania, manufacture artificial knees and hips, back discs and implanted heart valves, and stents and defibrillators — whose escalating price and use are a major contributor to rising health care costs.

During the floor debate, House Republicans used their standard argument against any new tax levy: It will cost jobs. But the heart of their complaint against the device tax, which doesn’t go into effect until January 2013, focused on the undocumented assertion that a slightly higher tax bill for industry would discourage firms from investing in research and development.

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“Companies will have fewer resources for critical research, development and staffing, which, combined gives America a cutting edge in the medical technology industry,” three Republican representatives from Midwestern states wrote in an op-ed recently in Roll Call, a newspaper that circulates on Capitol Hill. “The next implantable defibrillator or prosthetic advancements could be delayed because of the investment opportunities this tax takes away.”

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.

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Merrill Goozner

By Merrill Goozner

Merrill Goozner is an award-winning journalist and author of "The $800 Million Pill: The Truth Behind the Cost of New Drugs" who writes regularly at Gooznews.com.
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