This blog post is the second in a series examining the potential impact of health reform on medical device companies.  The first post can be accessed here. 

1.                  Payment Reductions. The Healthcare Reform Act did not include direct payment reductions that apply to specific types of medical devices, however there are provider payment reductions that will indirectly affect medical device manufacturers. For example, total payment reductions to hospitals during 2011 are expected to be in the range of.35% less than 2010 payments, according to the American Hospital Association.The Congressional Budget Office estimates that this will amount to $112.9 billion in hospital payment reductions over the next ten years. These reimbursement reductions will directly affect hospital budgets for certain types of capital spending and for spending related to devices that are not reimbursed as part of a Diagnostic Related Group. Device manufacturers should understand their customers’ budgets so they can anticipate whether their hospital and other provider customers may decrease their budget allocations for device purchases.

2.                  Stricter Fraud and Abuse Scrutiny. The Healthcare Reform Act amends certain federal fraud and abuse laws. Specifically, the Act amended the False Claims Act (“FCA”), the Anti-Kickback Statute (“AKS”) and the Federal Sentencing Guidelines. The FCA subjects a person to monetary penalties and/or imprisonment for knowingly and willfully falsifying, concealing or covering up a material fact, making materially false representations, or using a document known to contain any materially false statement. More significant to medical device manufacturers is the elimination of the FCA’s “Public Disclosure Bar.” The Public Disclosure Bar prevented a qui tam plaintiff from using publically available information as the basis for a claim against an entity suspected of violating the FCA. The removal of this bar will increase the potential financial reward for certain qui tam plaintiffs. Therefore, the number of claims brought against medical device manufactures will likely increase significantly. 

3.                  Shared Cost-Savings Reimbursement Programs. The Healthcare Reform Act sets forth certain reimbursement programs focused on rewarding providers for reducing the cost of care, including the formation of so called accountable care organizations, or “ACOs,” and extends an existing gainsharing demonstration program. An ACO is essentially an organization of physicians and other healthcare providers that is assigned a population of Medicare beneficiaries and is paid a share of savings achieved through coordinated care efforts, provided certain quality standards are achieved. Additionally, the Act authorized extension of the gainsharing demonstration program. While ACOs and gainsharing programs are not expected to have an immediate impact on medical device manufacturers, if these types of organizations gain traction, the utilization of certain devices and procedures may decrease. Device manufacturers that are preparing future sales projections should be aware of the development of these organizations and the potential impact thereof. 

4.                  Medical Device Innovation Funding.  The Healthcare Reform Act included funding for grant monies to spur medical device innovation. The grant program, called the Cures Acceleration Network, enables the Director of the National Institutes of Health to award grants in order to promote innovation in technology supporting advanced research, development and production of so called “high need cures,” including through the development of medical products. To receive grant money, an entity must submit an application containing detailed information about the project for which the entity is seeking the grant, contribute non-federal funds to the project in the amount of $1 for every $3 awarded under the grant, and must also issue a final report at the end of the project describing the project outcomes. The award maximum is $15 million per project for the first fiscal year that the project is funded, with the possibility of receiving additional monies of up to $15 million in the subsequent fiscal year. Currently, Congress has authorized $500 million for the program for fiscal year 2010. In addition to the grant program, the Healthcare Reform Act authorized the Qualifying Therapeutic Discovery Project, which grants a tax credit for any taxable year in an amount equal to 50% of the investment in any qualifying project. 

5.                  Pay for Quality. The Healthcare Reform Act includes numerous new initiatives pursuant to which provider reimbursement will be increased or decreased depending on the quality of care that providers are able to demonstrate. For example, Section 3008 of the Act provides that hospitals in the top quartile with respect to national rates of hospital acquired conditions will have their Medicare payments for all discharges reduced by 1%. Similarly, Section 3007 of the Act directs the Secretary to develop and implement a system where physicians are paid additional amounts for providing quality health outcomes for Medicare beneficiaries at a lower cost. These changes to payment systems will occur over an extended time period, but demonstrate that the CMS is moving toward a system focused less on payment for individual services, and more on paying for efficient, high quality, low cost care. Even more so than in the past, to successfully market devices, manufacturers will be required to demonstrate that hospitals and healthcare providers can improve efficiency, quality and value through the use of their medical devices.