Health care reform legislation and innovation

The Patient Protection and Affordable Care Act (PPACA) signed into law on March 23, 2010, will have an unprecedented impact on the practice of GI, and on the development of new technology in our field. The bill is enormous in scope, more than 2000 pages long, and regulations to administer the bill could run to more than 150,000 pages. The potential benefits and drawbacks of this reform legislation have been debated endlessly, and the final manifestations of the various statutes remain to be seen. The bill greatly expands access to health care, opens up Medicaid eligibility to all individuals and families with incomes up to 133% of poverty level, and also mandates health insurance exchanges intended to offer a state-by-state marketplace, where individuals and small businesses can compare policies and premiums and purchase insurance with a government subsidy, if eligibility applies. The bill eliminates all financial barriers to preexisting medical conditions and for certain preventive tests including screening colonoscopy. On its face this expansion of health insurance coverage, and elimination of barriers to screening colonoscopy, should be a boon for GI practices and also for GI pharmaceutical and device companies, because many patients previously uncovered will now have more affordable access to health care. Unfortunately however, the massive scope of the bill, the long period of time between passage and actual implementation, and the interpretation of the myriad statutes has created great uncertainties, leading to caution on the part of innovation companies. There are also statutes in the bill that may create specific barriers to innovation, and may cause less investment or a delay in the adoption of new med-tech.

The health care reform legislation greatly centralizes the role of the federal and state governments, and Medicaid and Medicare payment mechanisms may dominate, particularly through the state-based exchanges. Many states are already financially strapped and as more patients enter into the Medicaid rolls, payment rates to drug and device manufacturers, physicians, and hospitals might decrease, and specific services will likely be cut. This situation has already occurred in several parts of the country, and other states are requesting Medicaid waivers and block grants that will allow them to cut or eliminate certain payments or procedures with greater facility. This scenario may make it difficult for device and drug developers to recoup their costs or be profitable with new technologies. Much depends on whether the exchanges function as a robust marketplace with multiple private competing insurers, or if the government dominates with just a few federal or state-determined payers, with federal or state-mandated benefits. It is also unclear at this time whether allowed exchange benefits will be determined by third-party payers, by the federal government under Medicare, or by the individual states.

In addition, the PPACA calls for reduced annual payment updates for most Medicare and Medicaid services, substantial cuts to managed care plans, and the creation of accountable care organizations that are rewarded for holding the line on services and costs. None of this is particularly auspicious for the development and payment of new technologies. Companies may be very hesitant to develop innovations if the payment rates are too low, or if there is no mechanism to rapidly introduce the technology into a state-based or federal-based exchange plan.

Other PPACA mandates are perhaps even more concerning for the development of new technology. The bill calls for “value-based payments” for physicians, with value-payment modifiers to differentiate payments based on quality of care compared with cost, and also calls for public reporting of physician performance via a “physician compare” Web site. The Web site will include data on all patients seen, not just Medicare/Medicaid, and will also compare data between peers. In the same vein, the bill mandates the development of quality measures for each specialty. The department of Health and Human Services (HHS) in conjunction with the Agency for Healthcare Research and Quality (AHRQ), and the Centers for Medicare and Medicaid Services (CMS), is directed to develop outcomes measures for hospitals and physicians. The measures will include the 5 most prevalent and resource-intensive medical conditions per specialty. These requirements might make it difficult for physicians to rapidly introduce new technologies into practice for fear of appearing “too expensive,” or using new technology and incurring initially higher complication rates.

The health care reform legislation also establishes the Center for Medicare and Medicaid Innovation to “test, evaluate, and expand different payment structures and care delivery models” for providers and hospitals. Under law, the Secretary of HHS is allowed at his or her discretion to institute any payment model, including partial or full capitation, at any time and for any condition. In addition the Secretary of HHS is instructed to develop a pilot program on payment bundling for any particular disease (defined as 3 days prior to a hospital admission to 30 days post discharge), and “episode groupers,” which combine clinically related items and services into an “episode of care.” It is unclear whether these potential payment changes will reduce the cost of care; however, they will almost certainly introduce a chill into the introduction of new technology in GI and other specialties, because capitation and service bundling will not initially incorporate the cost of newer innovations.

The PPACA also calls for comparative effectiveness research via a Patient-Centered Outcomes Research Institute, which is instructed to look at clinical outcomes, practice variation, expenditures, and patient needs for various drugs, devices, or services. This process could also impair the introduction of newer technologies, if comparative effectiveness studies need to be completed before payments can be arranged or if this type of research increases the costs for developing new modalities.

The legislation establishes an Independent Payment Advisory Board (IPAB), a 15-member panel appointed by the President, which is intended to reduce the per capita rate of growth in Medicare spending. In the event that Medicare exceeds the expected rate of growth (which has happened almost every year since the creation of Medicare), the Board is required to make recommendations to reduce spending. By law, the IPAB is prohibited in making changes that would “ration care, raise revenues, increase premiums or modify existing benefits.” Thus there is concern in some circles that the IPAB could act by reducing physician and facility fees for certain procedures, or inhibit or delay the introduction of new services and procedures in an effort to hold down costs. This situation would create significant uncertainty on the part of drug and device innovators. Not knowing if a new drug or device would be allowed, or what the payment might be for same, a company might decide to forgo development or the introduction of a new innovation. Any IPAB decision can be overridden by a two-thirds vote in Congress, but given the current political tensions between the Democrats and Republicans, this would be very difficult to achieve on any specific issue.

The “Sunshine Act” is a provision of the health care legislation that requires any manufacturer of a Medicare-covered drug, device, or medical supply to report annually on any payments to physicians. The Act’s provisions are draconian and apply to any payment with a value of $10 or more, or an aggregate amount greater than $100 per year. This provision will make it much more difficult for drug and device companies to market new innovations, and might also act as a drag on new development if physicians are unable to accept funding from device companies for device research or are unable to obtain money for research studies.

Device tax

“If you want less of something, tax it”—Milton Friedman

One of the more controversial aspects of the health care act is the excise tax on medical device companies. To pay for new health benefits for millions of those currently uninsured, the bill calls for new taxes, including a provision imposing a 2.3% tax on sales of medical devices by manufacturers, producers, and importers. The tax will begin in 2013, applies to gross revenues not net sales, and applies to those revenues generated in the United States. Taxable devices include any medical device defined in Section 201(h) of the FDA Act, and intended for use by humans, with limited exclusions for devices purchased by the general public at retail for individual use, such as eyeglasses. There is no general exclusion for Class I medical devices (bandages, gloves, tongue depressors, and so forth). The excise tax is expected to generate $20 billion from the device industry through 2019. As recently noted by the CEO of Boston Scientific, the tax will adversely affect hundreds of device companies and will specifically cost his company approximately $100 million annually. The effect of the tax will be to limit investment in innovation, as it is widely expected that this is revenue that will be taken out of research and development, thus hindering the implementation of the next generation of medical devices. GI societies can also expect less money for education and research grants as the tax bites the bottom line of endoscope and accessory manufacturers. The timing of the tax is unfortunate, as research and development as a percentage of gross domestic product (GDP) is already declining in the United States. Pharmaceutical companies are also hit with a separate excise tax on drug sales, which gradually increases until the year 2019.