Device Tax and Physician Pay: Congress’ Chew Toys

“If you want a friend in Washington, get a dog, ” said President Harry Truman.

And right now, physicians and medical device companies are looking for political friends to replace the (un) sustainable growth rate (SGR) formula and repeal a politically unpopular medical device tax. But those friends are hard to find in a “pay-as-you-go” federal budget process that requires cuts for new spending.

Everyone is a competitor when the cost for getting what you want is a price someone else has to pay at the public healthcare trough.

Illusion of Bipartisanship

A brief outbreak of bipartisanship seems to have garnered enough momentum to repeal the 2.3% device tax and replace the SGR that will cut physician Medicare reimbursements by 24% this spring.

But hospitals and insurers already coughed up billions when the Affordable Care Act (ACA) was negotiated three years ago. They don’t want to kick in more and are not friendly to efforts that will help device companies and physicians at their expense. And lawmakers have gone on record to say they are not going to ask grandma and grandpa to pay more or take cuts on services.

2014 is a mid-term election year in the second term of a lame-duck president who doesn’t want to do anything to unravel his signature domestic policy achievement.

Show Me the Money

So where will the $30 billion to repeal the device tax and the $116 billion to replace the SGR come from? Nobody has come up with an answer.

Surprisingly, the prospects for the $116 billion SGR fix seem slightly brighter than repealing the tax. The $116 billion can come from the entire healthcare federal budget, while the device tax fix blows a $30 billion hole in the ACA and threatens the president’s legacy.

It’s Different This Time

Gail Wilensky, Ph.D. a former CMS [Centers for Medicare and Medicaid Services] Administrator wrote in the December issue of the New England Journal of Medicine (NEJM) that this year is different when it comes to the SGR.

“This year, for the first time, bipartisan, bicameral attention is being directed toward developing an alternative reimbursement system that rewards physicians who improve the quality and efficiency of care, rather than just kicking the proverbial SGR can down the road for one more year.”

On December 26, 2013, President Obama signed into law the Pathway for SGR Reform Act of 2013. The new law prevented a scheduled payment reduction for physicians and other practitioners who treat Medicare patients from taking effect on January 1, 2014. The law provides for a 0.5% update for such services through March 31, 2014 and gives lawmakers more time to work on fixing the SGR.

Congress has been granting pay hikes to physicians while bypassing the SGR formula and declaring it unworkable for a decade now. Only once have scheduled cuts actually gone into effect.

FierceHealthFinance.com, in a January 1, 2014 article, predicted that since that method appears to work and most of the proposals for SGR replacement begin with freezing physician payments for the rest of the decade, don’t expect lawmakers to make big changes here.

The Proposed Fix

In the meantime, both houses of congress are working on similar, but ever-changing bills that would:

• Increase payments by 0.5% through 2017 and flat payments through 2023
• Mandate “appropriate use criteria for advanced diagnostic imaging”
• Simplify current payment incentive programs by combining them into one value-based program
• Increase the public availability of provider payment data
• Give physicians who privately contract with Medicare patients the option to automatically renew their two-year opt out
• Provide 5% bonuses for doctors who use a qualifying alternative payment model and
• Give electronic health record (EHR) vendors until 2017 to make their EHRs interoperable.

After loud cries from physician groups against initial proposals that contained no Medicare payment increase for 10 years, lawmakers in both chambers provided a 4-year period of 0.5% payment increases.

Both proposals encourage the use of alternative payment models such as accountable care organizations, combine three quality incentive programs into one, and make numerous other changes to the way Medicare pays for the delivery of healthcare.

Neither bill specifies how to pay for the proposals.

Not all medical societies are on board. The American Urological Association, American College of Surgeons, and several other surgical groups—16 in total—wrote congressional leaders to urge them to oppose the bills or postpone markups.

The groups were concerned with the Value-Based Performance Incentive Program and low or no payment increases in the bills.

The North American Spine Society (NASS) and the Alliance of Specialty Medicine are also hesitant. NASS is concerned that certain provisions will have unintended consequences on patient access. In addition to the low or zero payment updates, the society is concerned that there are no assurances of a viable fee-for-service system; no inclusion of at least a five-year transition period to a new payment system; and the creation of a new budget-neutral, tiered quality payment program that measure an individual’s performance relative to others.

They say the proposals ensure that physicians become competitors, rather than collaborators, on quality improvement.

Bigger Is Better

Wilensky wrote that the incentives that the SGR presents to the individual physician are incompatible with the formula’s objective of controlling aggregate physician spending. “The SGR is driven by the aggregate spending of all physicians. Since no one physician or physician group is large enough to affect aggregate spending, good behavior can’t be rewarded and bad behavior can’t be penalized at the level of the physician or the group associated with the good or bad behavior.”

She added that the challenge is to determine which alternative payment or care-delivery models warrant increased reimbursement. “The hope is that some of the pilot projects currently under way sponsored by the Center for Medicare and Medicaid Innovation (Innovation Center) or by private payers will provide insights to answer this question. For example, can the various models for medical homes and accountable care organizations (ACOs) or other strategies being tested consistently produce savings, and are any early savings that are produced by voluntary participants likely to be generalizable and sustainable?”

“Obviously, the results for these activities are years off. Specialists may need to consider whether they will be able and willing to accept more financial risk than they have in the past. The success of physician-led ACOs may clarify their ability to do this successfully.”

Senator Max Baucus, one of the architects of the SGR fix, said, “We all share the same goals: improve the fee-for-service system, reward value over volume, and encourage physicians to transition to alternative payment models, such as medical homes and accountable care organizations.”

In other words, continue the strategy of having physicians become employees of larger healthcare systems and making treatment decisions based on the evidence of “Big Data.”

Maybe this year will be different, but don’t bet your practice on it.

Repealing the Device Tax: A Bridge too Far

The device tax has a bigger bridge to cross.

The recent budget signed by the president included a tax repeal, but only if spending cuts can be found elsewhere in the ACA. Hospitals, insurers and physicians aren’t volunteering to chip in.

The Curse of Success

Large medical device companies are perceived by some in congress as a highly profitable cartel that drives up device costs through a lack of transparency. The companies impose secrecy agreements on their customers, so buyers can’t compare prices. The large companies are not seen just as innovators bringing new devices to patients, but as a central problem to high healthcare costs.

Proponents of the tax cite a McKinsey & Company study that says the U.S. spends about 50% more than expected on the top five medical devices, compared with Europe and Japan. McKinsey calculates that this amounts to $26 billion in excessive spending each year.

AdvaMed: Outside the Tent

The medical device lobby (AdvaMed) also culled itself from the herd by sitting on the sidelines when the ACA was being put together three years ago.

While hospitals and insurers struck deals, AdvaMed, did not, and balked when lawmakers proposed legislation that would require producers to pay a tax on sales. They have been fighting it ever since, claiming that the tax will cost jobs, harm smaller companies and slow innovation.

Stephen Ubl, president of the association, said one reason the industry had not offered a cost-savings plan was that hospitals, which had already agreed to cost cuts, would seek price breaks from device producers. A separate tax on device sales would effectively result in “double taxation, ” he said.

Cash and Advertising Campaign

The industry has reportedly distributed at least $10 million in campaign contributions to lawmakers and kicked off a new advertising campaign in late September.

“Save 43, 000 jobs, save billions for investments in tomorrow’s treatments and cures, improve our global competitiveness, ” the advertisement said. The ad campaign was followed by a letter signed by nearly 1, 000 device manufacturing companies nationwide that was sent to leaders in both the House and Senate.

AdvaMed has few friends outside of senators from states that employ lots of medical device employees. Those senators, like Amy Klobuchar of Minnesota and Elizabeth Warren of Massachusetts have been able to cast symbolic, but meaningless votes, to repeal the tax.

The ad campaign started on the same day that The Wall Street Journal’s MarketWatch ran a story by Russ Britt saying the device tax was put in place in the first place because device makers had “soaring margins” in the decade prior to the passage of Obamacare.

Lukewarm Leaders

Then there are the personal politics of some industry leaders unwilling to invest their time to push for the repeal. The biggest dog on the block, Omar Ishrak, CEO of Medtronic, Inc. told an audience in Minnesota last summer at an AdvaMed event that he is not spending any time pushing for repeal because it’s the law of the land and the companies have to learn to manage the tax.

Unless AdvaMed can find cost savings from other healthcare providers or industry, or cut back on coverage under the ACA, Steve Ubl is going to have to get a dog.