With approximately two month having passed since the end of the government shutdown, the fundamental question still remains; what exactly did Congress achieve through the contentious shutdown negotiations?  The shutdown was spurred in part by certain Congressional Members’  opposition to the funding and implementation  of the Affordable Care Act (“ACA”).  A centerpiece of these oppositional demands was the repeal of the Medical Device Tax (“MDT”), which many industry professionals consider to be an inequitable financial aspect of the ACA.  In an era of decreased federal reimbursement for health-related services, added scrutiny of provider billing practices, and national pressure to decrease healthcare cost, surprisingly, the MDT may be eroding the dichotomy between providers and device manufacturers.  The MDT has begun to unite the two in a new risk-sharing paradigm that may ultimately reduce hospital costs in the long-run.  Perhaps, through provisions like the MDT, the ACA is accomplishing precisely what it set out to achieve. 

The Medical Device Tax and Immediate Implications 

The MDT is an excise tax imposed on “taxable medical devices,” which include all such human-intended devices listed with the FDA under Food, Drug, and Cosmetic Act § 510(j), including biological devices and combination drug-device products.  Any such products not listed with the FDA under 510(j) will not be subject to the MDT.  Exclusions to the MDT include: (1) specific statutory exemptions of eyeglasses, contact lenses, and hearing aids; and (2) the retail exemption of devices commonly purchased by the general public at retail for individual use. 

One projected implication of the tax, and a cornerstone argument for supporters of its repeal, is the downstream cost-shifting by device manufacturers onto providers.  In March, the Healthcare Supply Chain Association assembled a list of medical device and supply companies that informed hospitals of raised device and supply prices resulting from the 2.3% MDT.  Some companies have added the MDT as a line-item cost on invoices to hospitals and health providers for devices and supplies.  Notwithstanding, the IRS remained silent on the cost-shifting issue, while continuing its implementation of the MDT through its December 2012 final regulations and 2013 interim guidance.  Surprisingly, certain health organizations have begun to implement long-term cost managing strategies to obviate implications of the MDT.  These collaborative approaches, if carefully implemented, may diminish the impact of the MDT. 

Strategic Collaboration Opportunities in the Long-Run 

As the more costly provisions of the ACA, like the MDT, continue to be implemented, a number of cost-reducing, risk-sharing strategies have emerged, all of which reflect a trend toward collaboration between providers and suppliers.  Some strategies include: 

  • Long-Term Collaborative Contracts 

Providers, especially large health systems, may have greater negotiation leverage to enter into long-term deals for devices, supplies, new technologies, and services resulting from the ACA implementation.  Partially resulting from the ACA’s focus on cost-effectiveness and improved quality of care, in June, Georgia Regent Medical Center and Royal Philips entered into an approximately $300 million dollar contract spanning 15 years.  Although the public academic 503-bed medical center will not be required to exclusively purchase Philips devices and equipment, the deal memorializes the collaborative intent of the two organizations to integrate Philips Healthcare products into all areas of care delivery, including oncology, cardiology, and radiology.  The hospital will have access to device products in Philips’ business unit, including oral healthcare and lighting.  The deal reflects a collaborative approach to device purchasing, rather than a mere transactional approach.       

  • Group Purchasing Organizations & Sole-Source Contracting 

Some providers have formed group purchasing organizations to increase negotiation power in purchasing certain devices and supplies.  In September, Premier Healthcare alliance executed a deal with Ivera Medical for disinfection devices.  The contract makes Ivera the sole service provider for the GPO’s 2,900-hospital for 3 years.  Ivera will provide its Curos product line, including passive disinfection devices for needle-less IV valves and male-luer connectors.  Additionally, Ivera entered into an agreement with ASCEND, Premier’s cost-control collaborative program.  ASCEND integrates group purchasing, benchmarking metrics that identify supply chain and operational cost saving opportunities, and general knowledge-sharing among ASCEND participants. 

Legal Considerations

Although a step toward collaboration, the above mentioned cost-sharing and cost-reducing techniques are fraught with legal implications that deserve adequate consideration.  For instance, sole-source contracts immediately signal antitrust concerns, whereas discounted device supplies may implicate the Stark Law or the federal Anti-Kickback Statute.  Moving forward into the ACA era, collaborative agreements between device suppliers and quality care providers will require experienced legal counsel to adequately protect against such prospective liabilities.