By: Richard Park

“Unfair,” “counterproductive,” and “onerous” were some of the choice words used to express the IVD industry's reactions to and feelings about the potentially devastating bomb that was dropped on its doorstep last fall. In September, Senator Max Baucus (D-MT), chairman of the Senate Finance Committee, introduced the committee's healthcare reform legislation. Among the various methods proposed in the bill to pay for the healthcare reforms was a $4 billion tax on the medical device and IVD manufacturing sectors beginning in 2010, amounting to $40 billion during the next ten years.

Understandably, the medical device and IVD industries roundly criticized and voiced their strong opposition to the proposed tax. Some of the concerns were that such a tax would impede research and development efforts, would stifle the introduction of innovative products, and would be especially harmful to small companies.

“The proposed $40 billion tax on the medical device industry is particularly onerous,” said Stephen J. Ubl, president and CEO of AdvaMed (Washington, DC). “Such a tax will sharply cut the resources available for research and development of life-saving medical treatments. For context, consider that the majority of device companies combined spent a total of about $9.6 billion on research and development in 2007. This new tax is nearly half that amount. The tax also exceeds the total amount of venture capital dollars invested in device companies in 2007 ($3.7 billion), and on an annual basis, is four times what device companies raised in 2007 for initial public offerings ($1 billion).”

“Unlike the pharmaceutical industry, the medical device industry is composed of many small companies and very few giants that can withstand the payment of what is essentially a significant tax,” said Jonathan S. Kahan, JD, a partner at Hogan & Hartson LLP (Washington, DC). “It is extremely likely that the proposed payment to the government would have a negative effect on the IVD companies as they shift resources to pay the tax. It is almost certain that areas where there is the discretion to cut back, such as research and development, would suffer. Moreover, with the need to maintain profitability, IVD manufacturers would be constrained to lay off employees.”

In response to the proposed tax, various trade groups and associations representing the medical device and IVD industries stepped up their lobbying efforts in order to present to members of Congress, Senators, and other government leaders how damaging the proposed tax would be to manufacturers. Such efforts proved to be effective as demonstrated by the response of certain leaders and the actions they took as a result.

“We contacted practically every member of Congress who had an interest in the medical device and IVD industries and had industry employment in their districts, and urged them to help us convince the leadership in the House of Representatives that the tax should not be that high and should come down,” said David Nexon, senior executive vice president at AdvaMed. “A group of 15 members met with Speaker of the House Nancy Pelosi (D-CA), and she made a commitment to them that she would not only lower the tax but also insist that level did not go up during the conference negotiations. So it was a very successful lobbying operation, and we're very grateful to the members of Congress who stepped up to the plate for the industry.”

A number of governors and members of Congress publicly expressed their opposition to the proposed tax. For example, in late September, 20 members of Congress from California sent a letter to Senator Baucus. In this letter, they wrote, “This $40 billion tax would hamper R&D investment, slow innovation, and cut jobs at a time when unemployment in California is 12.2%. We cannot afford these losses.”

Also in late September, a group of five governors, including California Governor Arnold Schwarzenegger and Minnesota Governor Tim Pawlenty, sent a letter to Baucus. Their letter stated, “We believe this proposed excise tax would actually increase healthcare costs. Overall, prices for devices and diagnostics have increased at one-fourth the rate of other medical prices and at one-half the rate of the consumer price index.”

In addition, in early October, a group of fourteen Senators, including Senators Dianne Feinstein (D-CA) and John F. Kerry (D-MA), sent a letter to Senate leaders. In this letter, they wrote, “We are extremely concerned that this tax could threaten jobs in our states, reduce domestic investment in research and development, and ultimately diminish access to life-saving medical devices for patients. We urge you to moderate the tax proposal in order to prevent such necessary consequences.”

Another important lobbying effort was face-to-face meetings with Senators and members of Congress that IVD manufacturers arranged to discuss the proposed tax. For example, Paul Touhey, president and CEO at Fujirebio Diagnostics Inc. (Malvern, PA), held a roundtable with Congressman Jim Gerlach (R-PA). During the roundtable that involved the CEOs of four other IVD companies, Congressman Gerlach listened intently to their concerns about the tax. Touhey believes that the roundtable was very effective at showing the negative impact of this tax on not only the companies but also on all people who need healthcare.

“I have found that members of Congress and Senators are very interested in hearing from companies and their constituencies,” said Touhey. “I think the direct discussions highlighted that, frankly, we are all people who use healthcare so it's fine to reform healthcare. But let's do it in such a way that's more deliberative. The tax was just put together to plug a hole in the payment for the reform. I'm not sure that enough deliberation was done about that.”

The various lobbying efforts and meetings with members of Congress paid off as it appeared the message was getting through and sinking in. In early November, Congress passed its healthcare reform legislation that included a $20 billion tax over ten years on medical device and IVD manufacturers. A couple of weeks later, the Senate introduced its healthcare reform bill, which followed suit with a $20 billion tax on medical devices and IVDs.

“We're very pleased that the House of Representatives lowered the medical device tax to $20 billion, so it's a much lower and more manageable tax than the one that was originally proposed,” said Nexon. “Obviously we'd prefer no tax at all. But given the political dynamic, we did very well getting it down to $20 billion, and I think the IVD industry is going to support it at this level.”

Moving forward, AdvaMed officials said they are working on having a set of principles adopted in the healthcare reform bill that would make the proposed tax fair and work as well as possible. The first principle is that the start of the tax should be delayed until 2013 in order to give companies time to plan, prepare, and adjust. The second principle is that smaller medical device and IVD companies with less than $100 million in annual revenues should be protected and should receive more favorable treatment and consideration. The third principle is that the tax rates should be tiered by product type to reflect the diversity of the medical device and IVD industries and the different profit margins. For example, class one devices would be taxed at the lowest rate, class two at a middle rate, and class three at a higher rate. The fourth principle is that the tax should be transparent and deductible as is typical of other excise taxes.

Despite the $20 billion tax, AdvaMed officials believe that other provisions in the healthcare reform bill will promote and increase the use of IVDs and will benefit the IVD industry. For example, the Senate bill has a proposal for value-based purchasing for hospitals, which will encourage them to follow quality standards, many of which involve broader use of selected IVD tests. Both the House and Senate bills also include a focus on new forms of reimbursement (e.g., accountable care organizations, bundled payments), which puts the whole healthcare bundle together rather than paying on a fee-for-service basis, and puts a premium on providers to deliver care efficiently and do some cost reductions.

“We hope that providers will understand as they get into the healthcare reform that the more they use IVD tests, the better they can prevent disease, manage patient care, and target treatments, and the less extra or unnecessary expenditures they'll be making,” said Nexon. “There is also going to be a stepped-up effort to do comparative effectiveness research. That's challenging to some degree for diagnostics. But if done properly, again because IVDs are so valuable, it will help move the field along. So we're bullish on these changes in the payment system in terms of their impact on diagnostics.”

The Senate bill also has a provision (Section 3140) that requires the Department of Health and Human Services (HHS) to hold a public meeting to look at mechanisms for payment specifically for new clinical laboratory tests. It requires the HHS Secretary to report to Congress on the public meeting and to make recommendations about what legislative and administrative reforms should be made.

“We think that there are long standing concerns about the way that Medicare pays for new clinical laboratory tests, and that reforms in this area are critical,” said Teresa Lee, vice president, payment and healthcare delivery at AdvaMed. “So we're very supportive of the Secretary taking a close look and to having a public airing of all of the issues involved so that we can achieve meaningful reform.”

Another provision in the Senate bill (Section 3001) makes healthcare-associated infections a specific measure in hospital value-based purchasing. AdvaMed believes this provision is going to generate an increased emphasis on clinical laboratory diagnostic tests that can identify whether an individual does or does not have a specific healthcare-associated infection, and generate interest generally in infection control. There is an upside potential in promoting such best practices, particularly for those IVD companies with products in this area.