The Affordable Care Act: Implications for Emerging Med Tech Companies

Most Americans, even the smart ones, are still scratching their heads about what the Affordable Care Act (full name “Patient Protection and Affordable Care Act”, acronym  ACA) means for them. As a healthcare consumer, I have the year 2014 in my head as the deadline for when I need to figure it out, as it seems like all the main provisions don’t hit until then. As someone who develops 5-year plans for emerging med tech companies standing to win or lose as healthcare reform rolls out, I sort of need my head around it now. So I hunkered down, ingested several caffeine products, and dug into the details of the notorious  ACA.

Expanded Health Insurance Coverage

A cornerstone of the   ACA is the “individual mandate” to procure health insurance, which will add an estimated 30 million people to the insured pool. Keep in mind that these newly insured folks are not in the Medicare eligible group, so by definition they are younger and in less need of many of the aging-related devices such as orthopedic implants, pacemakers and the like.  An earlier S2N blog predicted that home care and wellness would win in the new healthcare economy, and in fact the  ACA  quite specifically enumerates several wellness and prevention programs that will be supported under reform, including weight management, heart disease prevention, diabetes prevention and stress management (couldn’t we all use a bit of that!). There are also increases in reimbursement and several demonstration projects for community- and home-based care for the toughest patients, e.g. dual eligible Medicare / Medicaid patients.

Primary care services are slated for increased reimbursement and bonuses under the  ACA, not that a lot of expensive devices are used in this setting. Wouldn’t be a stretch to imagine an increase in routine point of care testing with the encouragement of primary care and preventative services. There are also surgical categories such as women’s health and  ENT  that tend to hit the sub-Medicare demographic; these could get a boost from expanded coverage. I must not be the only one with this view, since  stocks of hospital companies shot up with the recent Supreme Court decision to uphold the act.

The Medical Device Tax

The provision of the  ACA  that attracts the most ire from the med tech community is, unsurprisingly, the medical device tax set to go into effect in 2013. To paraphrase, the justification for the tax is, “Hey, we are spending big buckage to insure a lot more Americans who will need a lot more of your fancy devices, so pony up!” Despite aggressive lobbying by the behemoths of the device industry, and a  House vote in June to repeal the medical device tax , Senate politics are such that this tax is likely here to stay.

To tease apart the impact of this tax on emerging med tech company, I turned to the tax experts: the  IRS. Because this tax is an excise tax, incurred upon the sale of the device to the customer and the responsibility of the manufacturer, there is nothing that exempts small med tech companies earning little revenue and generally no profit from paying the tax. And no, moving operations to Tijuana will not exempt you unless your customers are also there; the tax applies to the US sale regardless of where the company is located. However, the time-tested med tech strategy of first gaining approval and selling in Europe will soon have the added benefit of avoiding the US medical device tax, since ex-US sales are not subject to the tax (makes sense, since Uncle Sam is not paying for that hip implant in Paris).

Not all medical devices are subject to the tax, though. Exempt from the tax are medical devices  of a type generally purchased by the general public at retail for individual use, with the examples of hearing aids, contact lenses and eyeglasses, as well as durable medical equipment. We may see more activity in the consumer health sector as a result. The definition of medical device for purposes of the tax also excludes anything for which metabolization by the body is the chief mechanism of action; apparently someone forgot to tell the drafters of the legislation about combination products, so these details are still to be worked out. One good bit of news for emerging technology companies is that “Research Use Only” devices and those used under an  Investigational Device Exemption  (IDE) are not subject to the tax on the basis that these products are not yet registered with the FDA, a litmus tests for “taxable devices”.

In general, though, avoidance of a 2.3% tax will not be sufficient to overcome a weak market opportunity or value proposition. So my advice to emerging medical technology companies: you have enough to worry about trying to get your great products to work and not kill anyone, so ignore the tax for now and keep developing products that make a difference. The big device companies representing your potential exit will feel poorer because of the tax (depending on how much of their revenue is impacted), but will still need acquisitions to fuel growth. The question is whether they will shift to a focus on deals accretive to earnings, a la Covidien, which may be happening anyway.

Comparative Effectiveness Research

My read of the comparative effectiveness provisions of the  ACA  is that the end result is a fairly benign, motherhood and apple pie sort of approach. The  Patient-Centered Outcomes Research Institute, or  PCORI, the 2010 founding of which was one of the earliest tangible manifestations of the ACA, is far more constrained than its powerful UK cousin, the National Institute for Health and Clinical Excellence (misleadingly called  NICE), which can make or break the prospects for new devices trying to enter the UK market and beyond. Unlike  NICE, for example, reimbursement coverage decisions by  CMS  cannot be based on  POCRI  decisions, although they can factor into decisions along with other data and public commentary.  PCORI  is also going to be focused on the most costly treatments affecting the most Americans, which means that a lot of novel niche products being developed may never hit the  PCORI  radar.

Clinical effectiveness studies can cut both ways for emerging medical device companies. This type of research is most often associated with marketed products where utilization and related outcomes can be measured on a large scale. It is nearly possible to establish the kind of evidence to support clinical effectiveness in the size of studies normally conducted under an  IDE  before a product is commercial. Comparative effectiveness research on an existing market competitor could create an opportunity for an emerging company, for example if the company can demonstrate reduced costs (e.g. fewer complications) or improved outcomes with their device compared to the one just trashed by  PCORI.

With or without  PCORI, the bar has been raised on clinical evidence required for regulatory approval, reimbursement and adoption of new medical devices. If you need payors to cough up more money for your fancy new gizmo, they will find any lack-of-evidence stick to beat you with,  PCORI or no  PCORI.

Bottom Line

If you are an emerging med tech company executive who thinks he/she should be on top of healthcare reform, but between fundraising and hitting those milestones you just can’t get your head around it, don’t sweat it too much. If your technology makes sense today in the care of patients, it will probably make sense in the brave new healthcare world.

We’d love to hear your thoughts about how you believe the  ACA  will impact small med tech companies. As for the large companies, we’d like to know how this will affect your deal flow and targets (no whining about how much the tax will cost you, that’s what  Advamed  is for!).

[Image from flickr user Charles Fettinger]

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