Imaging equipment industry protests $40 billion reform tax

October 20, 2009

A coalition representing imaging manufacturers, pharmaceutical companies, and professional societies fears a corporate tax embedded in the Senate healthcare reform bill could stifle product innovation, though the exact financial impact of the proposed surcharge is hard to gauge.

A coalition representing imaging manufacturers, pharmaceutical companies, and professional societies fears a corporate tax embedded in the Senate healthcare reform bill could stifle product innovation, though the exact financial impact of the proposed surcharge is hard to gauge.

The Senate Finance Committee last week proposed raising $40 billion over 10 years, an average $4 billion per year, based on the sale of medical devices in the U.S. The money would be used to defray the cost of enacting healthcare reforms in the Congress's proposed legislation.

But the proposed tax, if enacted, could slow the pace of future imaging device research and development, according to the Access to Medial Imaging Coalition (AMIC). It could "turn back the clock on the war against cancer and other serious diseases," the coalition said in a release.

Vendors' R&D spending traditionally has been tied to a percentage of revenues regardless of taxes and other fees, as well as the competitiveness of the marketplace. There are unanswered questions about how hard the tax will hit individual imaging equipment vendors. The range of medical devices that would be subject to the tax has not yet been worked out.

"The definition could be put in legislative language, but that's not easy, because anything that is put in legislation has to be ‘definitionally' vague," said Don Moran, president of the Moran Company, a healthcare consulting and analysis firm in suburban Washington, DC.

It is clear that legislation passed out of the Senate Finance Committee last week asked for $40 billion over 10 years from medical device sales to help defray the anticipated $900 billion cost of the reforms. The bill also proposed taxes and fees imposed on pharmaceutical companies, hospitals, hospices, and others businesses that earn money from the U.S. healthcare marketplace.

Legislators typically set policy and leave the details to the agencies assigned to implement it. Consequently, bureaucrats, not legislators, will probably define "medical devices," Moran said. The Department of Health and Human Services, the agency likely to be charged with implementation in this case, may define this term narrowly by focusing, for example, just on implantable devices. A broader definition, however, is more likely to be adopted, as it will spread the burden over more manufacturers, according to Moran.

"The thing to keep in mind is that the policy is the number," said Moran, noting that the policy of the Congress is to raise $40 billion from the medical device industry. "The only issue being argued now is the size of the base from which this money is taken."

AMIC opposes the charges regardless of the payment formula. The coalition organized a protest rally on Capitol Hill last week. Cancer and heart disease patients joined representatives of patient advocate organizations and physicians to urge senators to reject the proposal. They charged that the proposed tax has the potential to stifle innovation in new imaging and cutting-edge cancer therapy technologies.

According to AMIC, the proposed tax is part of a "triple threat" against U.S. healthcare. The second threat involves proposed Medicare reimbursement cuts that would result from increasing the assumed utilization rate for the technical component of Medicare Physician Fee Schedule. The current rate is 50%, but it may be raised to 65% or 75%, depending on which of four proposed reform bills becomes law.

The third threat comes from potentially arbitrary changes to the 2010 Physician Fee Schedule. Congress must act this year to halt a 21% payment cut in physician fees now scheduled to take place. Moran said that the Balanced Budget Act of 1997 instituted a formula that dictates the annual adjustment of physician payments, a formula the Congress has been fiddling with for years, pushing off payment cuts from one year to the next.

"Every time they pushed out the cuts, they "bow-waved" the problem, making it bigger until now it's astronomical," he said. "Unless something is done, there will be a 21% cut in one whack."

And they have to fix it, Moran said, or they commit political suicide.

"If your physician tells you that your Congressman is depriving you of medical care, who are you to disagree with him?" he asked.

Few Washington insiders expect the Medicare Sustainable Growth Rate formula responsible for the mess to go unaltered for long. A bill introduced in the Senate Oct. 19 would repeal the SGR formula and substitute a 10-year freeze for physician payment rates in the Medicare Physician Fee Schedule.

Prospects for the legislation are unclear, however, because some senators would prefer to have its provisions folded into the comprehensive reform bill to increase the probability of the large bill's passage. Others worry about adopting a 10-year rate freeze without also identifying about $240 billion in spending offsets to cover the additional expenditures, according to Tom Greeson, a partner with the healthcare law firm of Reed Smith.

In its battle against the three threats, AMIC highlighted a letter signed by 20 patient advocacy organizations, urging President Obama and Kathleen Sebelius, secretary of DHS, to refrain from making further cuts to Medicare reimbursements for diagnostic imaging that "would jeopardize the health of America's seniors by delaying or precluding their access to the frontline tools that turn early detection into effective treatment and patients into survivors."