During the past 10-15 years, reimbursement and patient access related issues for big pharmaceuticals have been addressed in great depth, especially as they pertain to expensive biologics. The same can not be said for diagnostics and medical devices. The rules of the game, such as the market access model and FDA type requirements, may be quite different for bringing a medical device to the market, vis-a-vis biologics. In this article, we are addressing the medical device access issues.
To deal with some of the above differences, Congress has enacted a number of laws that affect Medicare reimbursement and coverage of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS). In 2003, the Medicare Prescription Drug, Improvement and Modernization Act (MMA) mandated a temporary freeze in annual increases in payments for durable medical equipment (2004 through 2008), and established new clinical conditions for payment and quality standards based on a competitive bidding process: Medicare reimburses only those suppliers selected through the regional competitive bidding process. The current competitive bidding program went into effect January 1, 2011 in nine geographic areas, and reimbursement to contract suppliers averages 32% below the Medicare DMEPOS fee schedule for the nine product categories currently included in the program. Plans are to expand the categories in the near future.
More recently, the Patient Protection and Affordable Care Act (ACA) signed into law March 23, 2010, is designed to expand access to affordable health insurance, control health care spending, and improve health care quality. Several provisions of the ACA specifically address the medical equipment industry. For example, the ACA eliminates the full inflation update to the DMEPOS fee schedule for the years 2011 through 2014. In particular, ACA reduces the inflation update for DMEPOS in 2011 by a 'productivity adjustment' factor which is based on the 10-year moving average of changes in annual economy-wide private nonfarm business productivity gains in delivering health care services. For 2011, the productivity adjustment is calculated by taking the inflation rate of 1.1% and subtracting the productivity gain is 1.2%, resulting in a 0.1% reduction to DMEPOS fee schedule amounts.
In addition, beginning in 2016, the ACA requires the Secretary of HHS to use competitive bidding payment information to adjust DMEPOS payments in areas outside of competitive bidding areas. The ACA also imposes a new annual federal excise tax on certain medical device manufacturers and importers. Specifically, for sales on or after January 1, 2013, manufacturers, producers, and importers of taxable medical devices must pay an excise tax of 2.3% based on the price for which the devices are sold.
Lastly, medical devices may also be impacted by changes in state health care legislative and regulatory policies expected to be adopted as a result of state budgetary shortfalls. Examples are proposed reductions in provider and supplier reimbursement levels under state Medicaid programs. Also, President Obama's proposed federal fiscal year 2012 budget - released on February 14, 2011, proposes to reduce federal reimbursement to states for their Medicaid DME expenditures (proposal calls for reimbursement equivalent to what the government would have paid under the Medicare DMEPOS competitive bidding program). The proposal requires Congressional approval, but if enacted it is expected to reduce Medicaid reimbursement for DME by $2.35 billion over five years.
Although the eventual impact of the ACA health reform provisions are still uncertain, it is possible that the legislation will have a material adverse impact on the medical device business.
All of the above point to the fact that as states continue to face significant financial pressures, the medical device business will most likely be adversely affected resulting in reduced profitability for years to come.