Thursday, April 22, 2010


As part of health care reform's package of revenue measures, the Congress decide to levy a tax on the medical device industry. Much lobbying by this industry, while failing to totally derail it, managed to push the implementation of this measure off for several years.

Some criticized this revenue measure, saying that it would raise health care costs as the industry would simply pass on the added cost to its customers (providers and hospitals) in the form of higher prices for medical equipment. The rebuttal from legislators pushing this measure was that competitive market forces would probably prevent these costs from being fully passed on. Hmm, even if correct, it is not clear to this blogger that it is appropriate for the Congress to capriciously pick on one industry to permanently reduce its margins... As to why they chose the medical device industry, this blogger has not seen an explanation , and speculates that perhaps the industry didn't donate enough scratch to Congress to "buy" immunity.

Well, the Wall Street Journal just published an article on the medical device industry, Medicare hospital payment proposal could benefit devices. Per the article:

"...New proposed Medicare payment rates for inpatient hospital treatment would generally increase reimbursement related to important medical devices, which suggests the system won't ramp up pressure on device prices in the near term. The proposal late Monday from the Centers for Medicare and Medicaid Services, coupled with a strong first-quarter report the next morning for Johnson and Johnson's (JNJ) huge medical-devices business, boosted stocks across the medical-devices space on Tuesday. The Medicare payment news was particularly welcome for a sector where investors and analysts have worried that changes to the healthcare system will put a squeeze on product prices. Such pressure may still build over the long haul, but the proposed Medicare rates for the fiscal year starting in October could ease worries about a more immediate impact. Medicare payments to hospitals don't directly impact devices prices. But they can have an indirect influence because the amount hospitals receive in reimbursement for procedures affects what they can afford to pay for devices used in those procedures. Analysts' estimates differed slightly, but they generally found modest proposed increases to reimbursement rates for procedures involving top cardiology and orthopedic devices, such as drug-coated heart stents and replacement hips ..."

So, apparently increased Medicare payments for inpatient use of some devices will reduce the pressure for higher device prices? Why? What absolute nonsense!

Consider a medical device company that gets hit with a new tax on its products. If it sells its devices to the hospitals (providers) at its usual pre-tax price then its margins will decrease. Now, if pursuant to the Medicare rules there are increased payments for device use, that would be increased revenue to the hospital and will do nothing for the manufacturer! If the manufacturer keeps its prices fixed it will lose and the hospital will gain. As such, this blogger doesn't see why better Medicare payments would be an inducement of any sort to the manufacturer, and thus they would probably seek to increase prices to offset their added expense.

OK, so if the manufacturer does raise prices and get it to "stick", then the devices will cost hospitals more. However, they (the hospitals) may be made partially or completely whole due to the increased Medicare payments, so they won't be too badly hurt. However, the net result would be an increase in costs across the board - for the commercial payers costs will be higher (might or might not translate to higher premiums); for the government (Medicare) revenue will increase via the tax collections and expenses will increase via the increased payments (unsure re the net effect here).

Bottom line: strange article, strange argument...

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