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.
Answers not supplied
Suppliers, buyers unsettled over cost mechanisms
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 share-based 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 Ventures, 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, drugmakers will pay $22 billion in taxes over 10 years beginning in 2010. But the House reconciliation bill would bump the fees up to $28 billion to be paid out between 2011 and 2019. Drugmakers will also pony up an additional $57 billion in discounts and rebates to Medicare and Medicaid. A portion of those savings would help bring down federal spending on the two entitlement programs and a portion would be passed onto Medicare beneficiaries and certain Medicaid providers.
Representatives from the drug industry lobby group Pharmaceutical Research and Manufacturers of America declined to comment on the tax, but in a written statement said the drug industry generally supports the Senate-passed bill and House reconciliation amendments.
The industry's decision not to publicly criticize the $85 billion price tag—which is $5 billion more than drugmakers had earlier negotiated with the Obama administration to pay—may be because of recognition that the arrangement avoids several more costly proposals that had been considered by lawmakers.
According to Moody's Investors Service analysts, those proposals included direct negotiation with Medicare for drug pricing and restoration of Medicaid-level rebates on prescriptions for patients who are Medicare/Medicaid dual-eligible.
If the House reconciliation amendments pass, drugmakers also will be able to scale back expansion of the Medicaid 340B discount drug program. The program allows hospitals serving large numbers of low-income and uninsured patients to purchase their outpatient drug supplies through the same manufacturers' rebate program used by Medicaid. By law, drugmakers are required to provide the discount to Medicaid.
Under the newly passed reform legislation, children's, free-standing cancer and rural hospitals are also eligible to purchase through the program, and inpatient drugs can also be obtained through 340B. But the House's reconciliation bill would strip inpatient drug acquisition from the legislation.
“If I'm one of those hospitals, I'm disappointed, in that I could have taken advantage of that pricing with my inpatient population,” said Christopher Hatwig, vice president of Apexus, the company tasked with contracting 340B drugs for the government. “My rough estimate is that the program would have doubled in size, and that obviously would have been significant to hospitals.”
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