Cost mechanisms a worry
Suppliers, buyers unsettled over cost mechanisms
Now that the on switch has been flipped, medical-product suppliers and purchasers are waiting to see how the newly minted healthcare-reform machine performs and what effects it will have on their businesses.
The massive piece of legislation contains a number of mechanisms meant to place downward pressure on the cost of drugs and medical devices while also requiring those industries to help pay for the nationwide expansion of medical coverage. They include taxes on both the medical-device and pharmaceutical industries and an expansion of the Medicaid 340B drug-discount program for certain providers serving low-income and chronically sick patient populations.
Uncertainty over how those mechanisms will work, however, has prompted a mix of cautious optimism, resignation, and “what’s next” strategizing among healthcare supply-chain officials.
“I think we all feel like this is a needed step in the right direction, but it will be challenging,” said Blair Childs, spokesman for the group purchasing and quality improvement organization Premier.
Chief among the many uncertainties is the final tally and payout of taxes assessed on the medical-device and drug industries.
The legislation calls for devicemakers to pay $20 billion in taxes over the next 10 years to help support healthcare reforms. Under the bill passed March 21 and signed into law March 23, the payouts are scheduled to begin in 2011, and the market sharebased tax will be assessed annually by the Internal Revenue Service. But the reconciliation bill the Senate passed last week—and which was headed to the House at deadline for final passage—would move the payout start date to 2013 and change the tax to a 2.3% excise, or sales, tax, which still aims to collect a total of $20 billion.
The proposed changes are a mixed bag of concern and relief for providers and devicemakers. The two groups are still battling over who ultimately will bear the burden of the tax. Providers fear that devicemakers will simply try to pass the tax on through higher prices or by adding a sales tax onto the cost of goods.
Lee Perlman, president of GNYHA Ven- tures, a group purchasing organization serving hospitals in the greater New York state area, said his group and other GPOs and hospitals plan to fight any efforts by devicemakers to pass along the tax. “The purpose of this tax was for devicemakers to contribute to the cost of healthcare reform,” Perlman said. He added that while providers are concerned that the excise tax would make it easier for devicemakers to try to pass along the costs, the House reconciliation amendments also would provide an additional two-year window for providers to fight off such attempts. “I want devicemakers to understand that our hospitals will not accept any form of that excise tax being passed along,” Perlman said. “We’re going to use our competitive forces during contract negotiations to make sure it doesn’t happen.”
But as determined as GPOs and providers are to avoid picking up the tax, devicemakers are equally determined not to bear the burden. Industry representatives argue that since device companies are not reimbursed by insurers, their products have no direct effect on the cost of healthcare. “The cost of a device is incorporated into the payment providers receive” for healthcare services, said Brett Loper, senior executive vice president of the device industry lobby group Advanced Medical Technology Association. “So in our opinion there are better ways to reduce costs. Our recommendation was to look at ways our customers are paid.”
Loper conceded that the House’s reconciled version of the tax is less biting than previous versions. “The benefit we see is that it is clear, more direct, and it’s deductible from a corporation’s income tax. That’s not to say it will have no effect on our customers,” he said. “You’d have to ask individual companies what their invoices will look like, but I suspect that someplace you’ll see a 2.3% excise tax.”
Pharmaceutical companies are also deciphering how their bottom lines will be affected by the reform legislation.
Under the current version of the law, drug-
Hatwig: “If I’m one of those hospitals, I’m disappointed.”
Childs: “Step in the right direction, but it will be challenging.”