US Medtechs Won't Rest On Laurels After Excise Tax Victory
Executive Summary
In the polarized environment of Washington DC, the US medtech industry was becoming increasingly concerned as 2017 turned to 2018 that the medical device sales tax would be reinstated after a two-year suspension. AdvaMed chairman Nadim Yared tells In Vivo about the efforts and lobbying that got Congressmen onside just in time – but the battle doesn’t stop there.
The US industry's despair over the medical device sales tax, which for all the world looked destined to be reinstated as of January 2018, turned to relief as last-ditch efforts by US manufacturers finally hit home in Congress in mid-month. Industry's success was largely down to lobbying initiatives inspired by senior officials at AdvaMed, but as that body's chairman Nadim Yared told In Vivo, lessons will be learned to ensure an 11th hour rescue mission is not necessary again in two years' time.
Speaking to In Vivo during MedTech Europe's annual industry forum (January 23-25 2018), Yared's predominant emotion was relief rather than euphoria. The tax has been suspended by a further two years, until the end of 2020, but he doesn't see it as job done, merely a stepping stone to permanent repeal.
As the year-end approached, AdvaMed was increasingly concerned that the two-year moratorium in place since 2016 would simply end. Manufacturers were reluctantly preparing to pay installments to the IRS as of January 15. This date was pushed back to January 29 as the wheels of negotiation began to turn.
AdvaMed had initiated discussions with all branches of government to press the case for industry. With the US Treasury, it sought to delay implementation of the tax or at least provide relief from the penalties that would be payable by companies. This bought the association more time to work with the legislative and other branches of the government to secure suspension or repeal. "So when the House Continuing Resolution [CR] came along, we asked for five years' suspension, but they put in two years – and we were not in a position to say no," says Yared, AdvaMed chairman since March 2017, and also a member of In Vivo's Editorial Advisory Board.
At the Senate level, discussions around the first iteration of the CR appeared to be pointing to the tax being left out of the bill entirely. But the final iteration was discussed by a group of 20 senators, and AdvaMed took the opportunity to speak to both sides of the political divide within this group, leading, finally, to the reinstatement in the CR of the two-year suspension. The CR was signed by President Trump on January 22, giving the industry another two years of tax respite.
But far from basking in this success, the industry is now determined to go a step further. "We're not going to wait another two years; we are starting the effort right now, and will look for another vehicle to which we can attach a permanent repeal of the medical device tax," said Yared. Medtechs tend to do their investment and product planning in a five to seven-year horizon. The device industry does not develop products within two years, the AdvaMed head said, explaining the knock to investment confidence that the reinstatement of the tax could potentially mean.
Even the time gap between December 31 and January 22, when the tax was ostensibly being reapplied, shook the trust of many medical device executives. The handling and timing of the suspension has also prompted the industry to take a critical eye of the legislators' abilities to maintain predictability in matters of business. The uncertainty caused by Congress's indecision has not gone down well in industry circles. "Two years ago, on the expectation that the first suspension would lead to a full repeal, many executives started investing again, and we added 29,000 industry jobs in the US." That trust is now dented, again, and AdvaMed has taken to monitoring investment/confidence levels.
Nevertheless, there was bipartisan support for repeal. Democrat senator Amy Klobuchar (Minn.), for one, played a major role in putting the tax suspension back into the bill after Senate minority leader Chuck Schumer had left it out. Yared explains that some members of Congress misunderstand the associated cost issues: "Some senators believe that repeal hurts the ACA. It does not." The claim among the tax's proponents that 47 million newly-insured people would "buy more medical devices," and that the tax would thus pay for itself, has also turned out to be disingenuous. "We don't have 47 million additionally insured, and those we do have are mostly younger, needing less devices."
AdvaMed fought this "incorrect hypothesis" early on, but the perception persists that the ACA funding could suffer under tax repeal. Yared said, "It is a question of priorities: do we want more tax revenue for the government, and with it more pain inflicted on the industry? Or vice versa? Frustratingly for industry, as Yared explains, politicians classify the tax as "only" 2.3%. But as a tax on the topline, it has immediate effects on the bottom line. In Yared's example of a company with $1 million revenue and 10% profitability ($100,000), the $23,000 sales tax levy is more like 20-30% on the bottom line, he notes.
It hurts the companies that are in heavy investment mode the most – those that are selling, but not making a profit yet. Those generating new programs or doing M&A in new technology will also have to pay the tax, harming their ability to continue or increase their investment.
"It is unfortunate, but the tax came to define our industry." – AdvaMed chairman Nadim Yared.
"Some congressmen understand it; some do not. We have 438 House Representatives and 100 Senators in the US. We have to educate each of them, but it's hard, because they are also dealing with funding issues for CHIP (the Children's Health Insurance Program), the Dream Act on citizenship pathways for undocumented immigrant youth, for example. In all this, our problem, as seen by many politicians, was less significant to their constituencies."
AdvaMed's response was twofold. First, seek voluntary contributions from members to start an education and marketing campaign late in Q4. The aims were to get the word out, and send a strong signal to Senators and House Reps, especially those who will be more active on this issue on the future. "It is unfortunate, but the tax came to define our industry," said Yared. Do an internet search for "medical devices US" and the tax will likely feature prominently, he suggests, clearly disappointed that the industry's positive contributions can be so easily buried under a single theme that can be fashioned into controversy.
The second strategy involved AdvaMed's government affairs officials, President Scott Whitaker and many AdvaMed executive members to start grassroots campaigns and build direct connections and relationships with their Reps and Senators. Of course, such networking outreach is not new to AdvaMed, but the co-ordinated way in which was achieved in this instance has been a high point, and was something that Whitaker brought to the table, Yared stresses. The Treasury action was also led by Whitaker, who had previously been an executive at HHS, and was able to use his residual contacts within that department.
New Stakeholder Attitudes Are Bridging Once-Unbreachable Divides
This type of cross-fertilization between sector stakeholders – FDA Commissioner Scott Gottlieb, MD, a former hospital physician and someone who had to appraise the value of medtech in his time at CMS is another prime example – is welcomed by industry. HHS secretary Alex Azar also seems to have the industry's vote, having been involved on both sides of the stakeholder "divide" previously holding an executive post at Eli Lilly & Co. . "It will be good to bring in his knowledge of how the world works and innovation pathways," said Yared.
Right now, the value-based agenda is on everyone's radar, but it's complicated, and moving at different rates of progress, says Yared. It also remains difficult to predict the twists and turns of medtech legislators in the US. There is no better example of this than the recent cancellation of CMS's plans to create a new pathway for conditional coverage for breakthrough technologies. The ExCITe, program, which had been with the White House's Office of Management and Budget since mid-2017, was withdrawn in late January with no early explanation as to why. (Also see "Medicare Will Look To Informal Pathways For Faster Medtech Reimbursement" - Medtech Insight, 30 Jan, 2018.). Scant CMS resources would not help, of course.
But it is a major disappointment. One of the aims of the 21st Century Cures Act was to allow breakthrough technologies to be approved quicker, particularly device therapies for life-threatening diseases. But the way that Congress is structured, with CMS reporting to one committee and FDA to another, the House Committee drafting the Cures Act has purview over FDA but not CMS, so the act contains no reimbursement elements.
Tax hiccups and CMS innovation pathway setbacks notwithstanding, there is a positive atmosphere for device innovators and organizations in the US. The beginnings of a more collaborative, efficient and responsive US ecosystem go back some five to six years, when CDRH director Jeffrey Shuren, MD, started implementing his vision of a device regulatory future in the US. The FDA has been making progress in its own right, regardless of political influences fair or foul.
For instance, under the encouragement of the FDA, the industry co-created the MDIC – the Medical Device Innovation Consortium – to work on specific projects with physicians, patient advocacy groups, FDA, CMS and NIH. (Also see "Murray Leaving Innovation Consortium, But Optimistic About Group's Future" - Medtech Insight, 30 Jan, 2018.) The aim is to advance industry's understanding of the science required to deliver innovative therapies that are "safe, effective, reasonable and necessary," and within a shorter timeframe and with less up-front investment.
"We've been learning how to be more effective with regulators and politicians but in turn, regulators have become more understanding of how industry works." –Nadim Yared
How to address patient input is one of the factors that arises from these joint projects. Another area for discussion under such projects is what level of risk a patient is prepared to accept. How is the benefit-risk ratio taken into account for patients of different ages, with different tolerances, and with diseases of different acuity and severity, including terminal conditions? Such issues are the remit of the MDIC, which started up some five years ago. "As an industry, we've been learning how to be more effective with regulators and politicians," said Yared, noting also that regulators have become more understanding of how industry works.
FDA for instance has lately been more interested in understanding the business plans of device innovators, and not just their products and data filings, to see if they can help them move forward. This interactivity and communication has improved significantly. It's not a question of coziness and making it easier for companies, Yared stresses, but about more safety and efficacy – and getting there faster, and with less upfront cost. Most of the MDIC's work is voluntary and largely funded by companies. "We get the best of the best of the industry working together, without boundaries, in a pre-competitive environment."
The Wheels Of Mutual Understanding Turn Faster
The changes are not happening overnight, and they are independent of politics and political change, but are all to do with cultural change. "Both sides understand each other's point of view and drive to advance science," said Yared, recalling the conversation he had some seven years ago with an FDA executive. Then, as an AdvaMed board member via CVRx Inc. (Barostim neo implantable technology for the treatment of high blood pressure and heart failure), Yared suggested that FDA should not be so much the "policeman" that approves or rejects products, but should let the patient and his/her physician make the final decision on therapy, based on FDA-approved data.
Three years ago, CDRH's Shuren used a Town Hall meeting to advocate his ideas for using automatic collection of big data produced by devices in real time, for a better understanding of risk. This means accepting a little bit more uncertainty, approving products earlier, maybe moving away from the binary, artificial world of pre- and post-market development phases, and developing a continuum of approval and uses. For example, the first uses of TAVR devices in the US were in high-risk patients, with FDA relying on registry data later on to expand the indication of use. "That’s what we're aiming for – use of real-time data, and evidence being developed faster, cheaper, easier," said Yared.
The level of tolerance to risk has to be decided by the patient and physician at the end of the day, Yared believes. He says Shuren has done a great job at CDRH, even though it took quite a while for the culture to shift at the FDA. And now it's time for CMS also to embark on this change, in Yared's view, although CMS has fewer resources and is more fragmented.
The Fight Against The Tax Goes On
Yared's two-year AdvaMed chairmanship runs until spring 2019. He has achieved much already, but remains firm and has an appetite for more. "We have so many issues to work on," he says, returning to the immediate matter at hand. "The tax is still not behind us, and although a suspension is better than nothing, it's not the end of the story."