CIMIT: September2009 Regulatory Affairs Monthly Topic

September 2009 Regulatory Affairs Monthly Topic

Senate Bill Proposes Funding Health Reform In Part by $40 Billion Fee on the Device Industry

Sen. Max Baucus (D-Mont.) released a long-awaited health reform bill on September 16, 2009, which proposes funding the reform via new fees on the health care industry, including $40 billion in new fees from the device industry over the next ten years.(1) The “America’s Healthy Futures Act” has been criticized by the medical device industry, which is now weighing into the debate as to how health reform should be funded.(2)

Sen. Baucus, chairman of the Senate Finance Committee, has been engaged in negotiations for months regarding the details of the American’s Healthy Futures Act.(3) The bill is one of many health reform bills currently being considered in both houses of Congress, but many analysts expect the Baucus bill will form the basis for the final health reform bill in the Senate.(4) Still, the U.S. Chamber of Commerce and eight members of Congress have announced their opposition, largely because of the device industry tax.(5)

The Baucus bill has been estimated to cost between $774 billion and $900 billion, to be paid for with a combination of savings, taxes, fees and penalties, including $409 billion in Medicare/Medicaid savings, $215 billion in taxes on health plans, $47 billion in penalties for employers/individuals who will not obtain insurance, and $88 billion in fees from health-related industries.(6) The device industry fee would amount to $4 billion annually, to take effect in 2010, compared with $6 billion for insurers and $2.3 billion for branded drug manufacturers.(7) The bill originally proposed a $750 million fee for clinical labs, but this was dropped from the bill during its mark up.(8) Concessions being made during the mark up also may result in decreased fees for insurance companies and uninsured individuals.(9)

The device industry fee would total $40 billion over the next ten years, and consist of annual contributions paid by individual device firms, based on the firm’s market share in the prior year.(10) In an effort to protect small device firms, the first $5 million of a company’s sales (defined as U.S. sales of medical devices regulated by FDA and subject to premarket and postmarket regulatory controls) will not be counted toward the annual contribution, and companies with annual sales of between $5 million and $25 million will pay a contribution based on only half their sales.(11) Additionally, sales of class I devices, veterinary devices, and class II devices sold at retail outlets for less than $100 would not be counted in the tally of a company’s annual sales.(12)

The rationale for the fees is that health reform will increase the number of customers for health-related industries because more Americans will be insured, therefore, companies can afford to contribute some of the increased profits toward funding the reform.(13) However, the device industry maintains that the $4 billion annual fee is not trivial and would amount to a 10% to 30% tax on device companies.(14) Meanwhile, some industry analysts claim that the fee amounts to about 4% of current industry profits, and that health reform efforts would increase device industry revenues by 4% to 7%, offsetting the fee.(15)

Congressional aides have indicated that political concerns may be beyond the high fees.(16) When health reform negotiations began in the spring, various segments of the healthcare industry began offering financial concessions to help pay for reform, with the drug industry offering $80 billion in savings and the hospital industry offering $155 billion in savings.(17) Congressional staffers say the medical device industry did not commit to a specific level of contribution.(18) Rather, the medical device industry suggested a tax on hospital group purchasing organizations, a suggestion which apparently was not viewed favorably.(19) As a result, Congress devised its own dollar amount, which aides say is likely to remain in the bill.(20) As the healthcare debate continues, it remains to be seen whether these fees will remain in place. (21)

1. The Wall Street Journal, “Senate Bill Sets Lines for Health Showdown,” September 17, 2009; The Wall Street Journal, “Overhaul’s Contours Are Starting to Take Shape,” September 9, 2009.

2. The Wall Street Journal, “Medical Device Makers Scramble to Avert New Fees in Health Bill,” September 15, 2009;The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009.

3. Politico, “Some Dems to Balk at Baucus Bill,” September 16, 2009.

4. The Wall Street Journal, “Senate Bill Sets Lines for Health Showdown,” September 17, 2009; The Wall Street Journal, “Overhaul’s Contours Are Starting to Take Shape,” September 9, 2009; The Gray Sheet, “Health Reform Plans: A Side-by-Side Comparison,” September 21, 2009.

5. The Wall Street Journal, “Sen. Kerry Fights a Proposed Health Tax,” September 22, 2009; The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009; Minneapolis Star Tribune, “Klobuchar, Franken Oppose Device Firm Tax,” September 16, 2009; The Wall Street Journal, “Senate Bill Sets Lines for Health Showdown,” September 17, 2009.

6. The Wall Street Journal, “Senate Bill Sets Lines for Health Showdown,” September 17, 2009; The Wall Street Journal, “Overhaul’s Contours Are Starting to Take Shape,” September 9, 2009; The New York Times, “Senate Health Bill Draws Fire on Both Sides,” September 16, 2009.

7. Chairman’s Mark, “America’s health Future Act of 2009,” available at http://finance.senate.gov/sitepages/leg/LEG%202009/091609%20Americas_Healthy_Future_Act.pdf; The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009.

8. The Gray Sheet, “Clinical Lab Fee Is Removed From Baucus Health Reform Bill,” September 28, 2009.

9. AmericanHealthLine, “Baucus Makes Concessions, Adds About $50B More to Bill To Extend Affordability,” September 23, 2009.

10. The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009.

11. Id; Chairman’s Mark, “America’s health Future Act of 2009,” available at http://finance.senate.gov/sitepages/leg/LEG%202009/091609%20Americas_Healthy_Future_Act.pdf

12. The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009; The Gray Sheet, “Device Industry Fee In Play As Baucus Bill Plods Along,” September 28, 2009.

13. The Wall Street Journal, “Medical Device Makers Scramble to Avert New Fees in Health Bill,” September 15, 2009; The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009.

14. Id; Minneapolis Star Tribune, “Klobuchar, Franken Oppose Device Firm Tax,” September 16, 2009.

15. The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009.

16. Id; The Wall Street Journal, “Medical Device Makers Scramble to Avert New Fees in Health Bill,” September 15, 2009.

17. The Wall Street Journal, “Medical Device Makers Scramble to Avert New Fees in Health Bill,” September 15, 2009.

18. Id.

19. Id; The Gray Sheet, “Device Firms Dig in Against Baucus Fee, Despite Class I, Revenue Exceptions,” September 21, 2009.

20. Id.

21. The Gray Sheet, “Device Industry Fee In Play As Baucus Bill Plods Along,” September 28, 2009.