Study of device tax reveals more about the impact of the ACA on Medicare reimbursement

The fight over the Affordable Care Act's 2.3% medical device excise tax has drawn various federal institutions into the fray, most recently the U.S. Government Accountability Office.

At the request of Senate Minority Leader Harry Reid (D-NV), the GAO weighed in on the healthcare reform law by looking at the finances of several small, medium and large device companies before and after the implementation of the ACA. They also analyzed companies' public statements about the impact of the law on their business.

Due to the peculiar and toxic politics of the ACA, several Democrats supported repealing the device tax in a nonbinding Senate vote in March 2013, but party leaders like Reid have resisted bringing the issue up for a binding vote.

The GAO report doesn't clearly support either side, unlike a previous study by the Congressional Research Service, which found that it will have negligible impact on med tech output and jobs.

The report does draw attention to an issue raised by the ACA that's actually getting more attention from industry speakers at med tech events and conferences--an issue that they often say outweighs those posed by the increasingly cooperative FDA, or the device tax, which seems to be third on their list of concerns.

"Industry trade group representatives we interviewed told us the medical device excise tax and changes in reimbursements--particularly to Medicare hospital reimbursements--have had the greatest impact on their member companies," the report says.

The law includes provisions that reduced Medicare reimbursement for services that use imaging devices, GAO says. More generally, it ushered in a new era of restrictive reimbursement and skepticism at the federal Centers for Medicare & Medicaid Services.

More than half of the companies have reported impacts to their business from the reimbursement changes. One said that the law "had created uncertainty regarding reimbursement and delivery of services, resulting in reluctance on the part of healthcare providers to improve their practices with new products and equipment," the report says.

Another said that "pilot programs to evaluate alternative payment methodologies and other changes to the payment systems resulting from PPACA may adversely affect its business," while a third company said that "demand for the medical devices it produces could decrease if fewer hospital procedures are performed due to reductions in Medicare reimbursement rates."

As the GAO admits, simply looking at net sales and profits before and after the ACA doesn't say much about the law's impact because a number of variables influence those top-line numbers.

But the data is still illuminating. Net sales at the 102 companies surveyed increased from $95 billion in 2005 to $136 billion in 2014.

The GAO found the device industry is top-heavy, something followers of last summer's med tech merger mania already knew. The 30 largest companies accounted for more than 95% of the group's net sales every year from 2005 to 2014.

Their profits grew by 43% from $11.8 billion to $16.9 billion over the years. "In contrast, the 35 medium-sized and 37 small-sized medical device companies GAO reviewed each experienced overall net losses in each year," GAO says.

The crucial fight over reimbursement will be played out via somewhat obscure provisions in laws like the 21st Century Cure Act, which recently passed in the House of Representatives with limited fanfare.

Meanwhile, the public fight over the 2.3% tax (actually 1.5% when federal tax deductions are taken into account) is getting nasty, certainly in the nation's capital, where it was even up for negotiation during the October 2013 government shutdown. And earlier this summer the Washington Post's periodic Fact Checker gave AdvaMed's claim that the tax will cost more than 30,000 jobs three Pinocchios.

- read a summary of the report
- here's the full report (PDF)