During the recent debt ceiling debacle in Congress, Tea Partyers were demanding that the medical device tax in the Affordable Care Act be eliminated. This is yet another example of politicians trying to sell a bill of goods to the American people in the guise of shrinking government and lowering our debt. The truth is, in fact, quite the opposite. The medical-device industry waged an intense lobbying campaign –– spending more than $50 million — even garnering the support of many Democrats who favored the law — arguing that the tax would stifle innovation and increase health care costs.
The medical-device industry faces virtually no price competition. Because of confidentiality agreements that manufacturers require hospitals to sign, the prices of the devices are cloaked in secrecy. This lack of transparency impedes hospitals from sharing price information and thus knowing whether they are getting a good deal.
Even worse, manufacturers often maintain personal relationships (sometimes involving financial payments like consulting fees) with physicians who choose the medical devices that their hospitals purchase, creating a conflict of interest. Physicians often don’t even know the costs of the devices, and individual physicians often choose devices on their own, which weakens a hospital’s ability to bargain for volume discounts.
Such anticompetitive practices obviously contribute to higher prices in general. For example, the Government Accountability Office (GAO) found that prices for cardiac implantable medical devices in the United States vary by several thousand dollars. And even the lowest-priced devices in the United States are expensive compared with those in other developed countries. According to the consulting firm McKinsey & Company, the United States spends about 50 percent 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.Medicare, private health insurers and patients end up paying these inflated prices.
Excessive prices fuel enormous profits — profits that dwarf both the medical-device tax and the industry’s investments in research and development. Consider the device division of Johnson & Johnson, which in 2012 had an operating profit of $7.2 billion. By the company’s own estimate, the device tax would amount to at most $300 million, and its investment in research and development amounts to only $1.7 billion.
There are several ways policy makers could lower device costs. The first step would be to end the anticompetitive practices that prevent hospitals from getting the best deals.
Currently, medical-device manufacturers allocate only a sliver of profits to research and development and often focus on “tweaks” to existing devices, without providing any evidence that they are of better quality. Competitive pressures from public and private payers would provide incentives for the industry to become more innovative, producing technologies that actually lowered costs and offered truly advanced breakthroughs.
Instead of using its clout to lobby against the device tax — which helped foment opposition to the Affordable Care Act — the medical-device industry needs to share the responsibility of lowering costs for patients, businesses and taxpayers.