[Ip-health] Topher Spiro op-ed in the New York Times: The Myth of the Medical-Device Tax

Thiru Balasubramaniam thiru at keionline.org
Thu Oct 17 06:34:36 PDT 2013

OP-ED CONTRIBUTORThe Myth of the Medical-Device TaxBy TOPHER SPIRO

Published: October 16, 2013

WASHINGTON — IN the last few days of negotiations in Congress, repeal of
the Affordable Care Act’s tax on medical devices emerged as a key
Republican demand. The medical-device industry waged an intense lobbying
campaign — even garnering the support of many Democrats who favored the law
— arguing that the tax would stifle innovation and increase health care

This argument is doubly disingenuous. Not only can the medical-device
industry easily afford the tax without compromising innovation, but the
industry’s enormous profits are a result of anticompetitive practices that
themselves drive up medical-device costs unnecessarily. The tax is a
distraction from reforms to the industry that are urgently needed to lower
health care costs.

The medical-device industry faces virtually no price competition. Because
of confidentiality agreements that manufacturers require hospitals to sign,
the prices of the devices are cloaked in secrecy. This lack of transparency
impedes hospitals from sharing price information and thus knowing whether
they are getting a good deal.

Even worse, manufacturers often maintain personal relationships (sometimes
involving financial payments like consulting fees) with physicians who
choose the medical devices that their hospitals purchase, creating a
conflict of interest. Physicians often don’t even know the costs of the
devices, and individual physicians often choose devices on their own, which
weakens a hospital’s ability to bargain for volume discounts.

Such anticompetitive practices help generate a wide variation in the prices
of medical devices — and contribute to higher prices in general. For
example, the Government Accountability Office found that prices for cardiac
implantable medical devices in the United States vary by several thousand
dollars. And even the lowest-priced devices in the United States are
expensive compared with those in other developed countries. According to
the consulting firm McKinsey & Company, the United States spends about 50
percent more than expected on the top five medical devices, compared with
Europe and Japan. McKinsey calculates that this amounts to $26 billion in
excessive spending each
private health insurers and patients end up paying these inflated prices.

Excessive prices fuel enormous profits — profits that dwarf both the
medical-device tax and the industry’s investments in research and
development. Consider the device division of Johnson & Johnson, which in
2012 had an operating profit of $7.2 billion. By the company’s own
estimate, the device tax would amount to at most $300 million, and its
investment in research and development amounts to only $1.7 billion.

There are several ways policy makers could lower device costs. The first
step would be to end the anticompetitive practices that prevent hospitals
from getting the best deals. Senator Charles E. Grassley, Republican of
Iowa, has sponsored legislation that would foster transparency by posting
online price information for implantable medical devices.

In addition, instead of simply paying hospitals based in part on what they
have spent on devices, Medicare should force manufacturers to compete for
business based on a product’s price and quality.

Medicare should also pay hospitals a single lump sum for all of the
associated costs of a given procedure (like a hip replacement). This
approach, known as “bundling” the costs, would create incentives for
hospitals to lower device costs. Savings should be shared with the
physicians, so that their incentives are aligned with the hospital’s.

Bundling has been used successfully in pilot programs. Under Medicare’s
Acute Care Episode Program — which bundled payments for cardiac and
orthopedic procedures — physicians worked together to choose high-quality,
cost-effective devices. Baptist Health System in Texas, which participated
in the program, used clinical evidence to choose devices and negotiated
lower prices for both Medicare and non-Medicare patients.

States could adopt similar payment reforms for private insurance and their
In Arkansas, the Medicaid program and private payers — including Walmart —
have collaborated to adopt bundled payments for several procedures,
including hip and knee replacements.

To complement these efforts, the new Patient-Centered Outcomes Research
Institute, a nongovernmental body created by the Affordable Care Act,
should pay for research that compares the effectiveness of devices so
physicians can make informed choices. (Three years into its existence, the
institute has initiated few, if any, studies of medical devices.) Medicare
or the Food and Drug Administration should also require the use of
registries that track when devices fail.

Currently, medical-device manufacturers allocate only a sliver of profits
to research and development and often focus on “tweaks” to existing
devices, without providing any evidence that they are of better quality.
Competitive pressures from public and private payers would provide
incentives for the industry to become more innovative, producing
technologies that actually lowered costs and offered truly advanced

Instead of using its clout to lobby against the device tax — which helped
foment opposition to the Affordable Care Act — the medical-device industry
needs to share the responsibility of lowering costs for patients,
businesses and taxpayers.

Topher Spiro <http://www.americanprogress.org/about/staff/spiro-topher/bio/> is
the vice president for health policy at the Center for American Progress

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