SCOTUS Upholds Affordable Care Act; Device Tax Continues to be a Worry

The Supreme Court this morning upheld most of President Obama’s Patient Protection and Affordable Care Act (ACA), a decision that means the medical device tax slated to go into effect next year will stay in place.

Per Chief Justice John Roberts, the individual mandate, which requires Americans to buy health insurance or pay a tax penalty, falls under Congress’s ability to levy taxes. The court ruled that Congress acted within its authority to impose the individual mandate by using its taxing powers to enforce the requirement.

"The mandate can be regarded as establishing a condition—not owning health insurance—that triggers a tax—the required payment to IRS," Justice Roberts wrote.

Though the ruling will effectively allow President Obama’s healthcare law to stand, the court did limit the Medicaid expansion provision of the law. The justices ruled that Congress can expand Medicaid but can't strip states of all their Medicaid funds if they fail to participate in that expansion.

Roberts sided with the majority in the 5–4 vote. The four dissenters were Anthony Kennedy, Antonin Scalia, Clarence Thomas, and Samuel Alito.

As a result of the decision, the 2.3% medical device tax included in the ACA will go into effect in 2013 unless it is repealed by Congress.

AdvaMed’s Stephen J. Ubl released a statement early this morning in response to the ruling. “AdvaMed supported goals of health care reform consistent with our long-held principles,” he said in the statement. “We have consistently opposed the $29 billion medical device tax because of its damaging effects on economic competitiveness, jobs and the research and development needed to find tomorrow’s treatments and cures. The House has already voted to repeal the device tax, and we are heartened by the number of senators who have said they oppose the tax.”

So what does this mean for device makers? It could be that the decision won’t change much about the way they do business.

“For medtech, the pressures to reduce costs and improve outcomes (at lower costs to the system overall) will not abate,” says Bill Evans, principal and founder of Bridge Design.

A recent report of hospital executive spending from ITG (download the executive summary here) provides further support. “More than ever, the bottom line is the bottom line,” says the report, noting that over 90% of executives reported they are concerned or very concerned about declining reimbursement rates, the ACA, ICD 10 implementation, and pay-for-performance initiatives. “These worries will dampen spending in the short term,” the report observes. “Suppliers must be able to demonstrate that their products and services will enable providers to reduce costs.”

Evans says that “overall pressure in the system is cost reduction, coupled with outcome improvement based on the premise that the more people who are covered the more cost pressures will prevail.

According to Evans, value suppliers of disposables and capital equipment will do well. He also predicts that electronic health record vendors will succeed, as will mobility and wireless technology products.

Stephen W. Sagon, president and CEO of CardioFocus says his business is unlikely to change. “The court’s decision to uphold the individual mandate would be welcome in terms of increasing access to our products, once they are approved,” he says. however, we wouldn’t really expect any impact to our business in the short term because our technology was built to improve efficacy.” Cardio Focus produces a cardio ablation system that encompasses a balloon catheter, and sheath introducer, and endoscope, and touchscreen visual console.

Sagon notes that an increase in insured patients should serve to help the medtech industry. One note of concern for Sagon is comparative effectiveness, which is a key part of the ACA. “Device makers will have to show hospitals that their products are really valuable in terms of cost and effectiveness.”

As a lawyer, Sagon’s observations about the about individual mandate are fairly nuanced. “I wish the act was easier to understand,” he says. “It’s not clear how all the pieces fit together to improve access, reduce costs, and increase dividends to stakeholders. Don’t forget that industry is one of the key stakeholders. I think with people failing to see the interrelationships it is easier to campaign against something that might involve some pain than figure the whole thing out. That’s why the effort to repeal has been so strong."

But, Sagon says, “what people don’t realize is how interconnected these systems are.” It gets tricky, he says, “when you try to separate out an individual mandate from the dividends that are designed to accrue throughout the rest of the system.” The healthcare system is intricate and the effort to improve access and reduce costs involves a delicacy. “Imagine someone removing a portion of your IFU because they didn’t like the way it sounded.”

A key concern for Sagon is implementation. “Implementation can be severely affected by subsequent congressional action or inaction,” he says. “Some money has already been taken away from the ACA. We’ve got this mandate that everyone must buy insurance, but funding to build necessary facilities isn’t in place. Through the mandate we’ve sold people the tickets, but it could be there won’t be enough seats.”

Evans predicts that the healthcare system will need to rely on technology to fix such problems. “Because of the influx of new people to primary care, suppliers of healthcare must account for a lack of trained and qualified staff to service the newly insured,” he says.

The Future of Reform

“A focus of reform is delivering basic healthcare to more people and a big cost reduction hope is to reduce the role of ERs as the de facto supplier of emergency treatment to the poor,” Evans says. He says that medtech suppliers that focus on cost reduction, error reduction, reducing the impact or stopping “never” events, and preventative approaches that produce short-term results will fare better.

It’s also difficult to talk about the ACA without mentioning the looming device tax. “The consequences for medtech are significant, with the most obvious being the impact of the device tax to take effect in 2013,” explains Pete Masloski, principal at ZS Associates. “While many companies would hope they could pass this additional tax on to their customers in terms of higher prices, most in the industry face a challenging competitive environment and a more price sensitive and sophisticated buyer who will not allow the price to be passed through. The result is that the tax will force companies affected to slash costs in any place the can, most likely in R&D and SG&A. Expect to see more announcements of companies restructuring to lower costs if the tax remains. Many industry leaders have already announced plans to do so (Stryker, Medtronic, etc.).”

Heather Thompson is editor-in-chief of MD+DI.