Reimbursement Changes, the Device Tax, and You

I recently interviewed Venkat Rajan, industry manager, medical devices at Frost & Sullivan about the implications of Abbott splitting their pharma and medical device businesses. We talked about a number of other topics as well including the likely impact of U.S. healthcare reform on the industry. Rajan acknowledged that Affordable Care Act will strain the current device model, largely because of its prescribed changes to reimbursement and the much-talked-about device tax. "Costs [in the United States] have reached somewhat of a breaking point, where we are spending too much of our GDP on healthcare. Hospitals are operating at a thin margin already."

Growing numbers of people going into retirement in the United States and that is forcing caps on reimbursement. In light of that, it can be hard to innovate because new technology is often more expensive than older technology. "If a device costs 50% more than a previous product, the hospital will look at it and see that as cutting into their margins," Rajan said. The hospital already has to pay the fees for the doctor, the cost of the surgical room, and so forth, he adds. "The money [to pay hospitals' bills] has to come from somewhere, so there isn't much room for them to adopt newer technologies."

As an aside, I spoke with medtech industry veteran Thomas Fogarty, MD yesterday who backed up the notion that medtech innovation is threatened in this country. Fogarty said he expected the number of groundbreaking medical device introductions to decline within the next three to five years. He said FDA was mostly to blame for that, although he acknowledged the agency is working to respond to industry's concerns about device clearance. FDA, however, is not working nearly fast enough to meaningfully address the issue, Fogarty said. Change must happen now, he stressed.

Returning to the likely implications of healthcare reform: The device tax also will pull down device companies' margins, Rajan says, but the device industry's problems are multifactorial: "You have costs going up just for doing business.You have inflation, rising costs of resins and plastics, and costs of materials are going up," he says. You can’t necessarily adjust pricing of your final product to make up for that.

By contrast, if you are making, say, tablet PCs, the price pressures would likely be translated to the final product. "Device companies don't have the same ability to adjust for costs." If you look at it long term, there is definitely the patient volume [to support robust business for the device industry]. "The market should grow but the margins will be declining."

—Brian Buntz