Thursday Op-Ed: Fact or Fiction You Be the Judge

The last few days have validated the anger and frustrations that run rampant within the medical device industry based on the diversions in your comments.  Its also interesting when someone criticizes TSB but can't get off the site and comments incessantly, but we still respect those individuals first amendment rights, regardless.  Anger and Frustration? Definitely. Informed and knowledgeable? Maybe at best. The question that TSB must ask our readers is whether anyone has a comprehension of the nuances that encompass the MDET?  Do Americans have the flexibility or the ability to adapt to change? No. Contrary to that old expression "change is good," everyone would like to keep the status quo even when everything is collapsing around you.  What would happen if we actually attempted to change?  What if we really moved forward and provide medical insurance to an additional 33 million people?  

The facts are self-evident.  We know that the medical device tax will not cause manufacturers to shift jobs overseas because the tax applies equally to imported and exported medical devices, and devices that are manufactured in the United States for export are tax-exempt.  Fact, the tax should have little or not effect on innovation since it may motivate medical device companies to innovate cost effectively.  As more pressure is placed on companies to lower the ASP, how will companies sustain profits?  As many Baby Boomers enter their golden years, who will subsidize your Medicare entitlement in event of a major catastrophic event?  Nuvasive? Globus? J&J? Orthofix? Zimmer? Contrary to your beliefs, you'll be standing in line waiting for your Medicare entitlement because your argument will be that you paid for it, and you're entitled to it. If you deny it, you're not only lying to our readers, you're lying to yourself.

If the Affordable Care Act expands coverage for an estimated 33 million uninsured or unqualified Americans, who will benefit?  Does anyone believe that any of the aforementioned companies will not benefit from healthcare reform?  The medical device industry is a $120 billion dollar industry. Ten of the largest device makers account for 86% of sales which means that they will account for 86% of receipts of the excise tax.  Despite what you read, the tax creates no incentive for these companies to move manufacturing overseas.  This tax is an equal opportunity employer, meaning that the tax will apply whether your products are manufactured in the U.S. or abroad.  The 43,000 potential jobs that would be lost, as cited by AdvaMed is not credible to say the least because it is based on hypothetical assumptions.  AdvaMed hired a consulting firm by the name of Battelle to assess the effect of a "hypothetical event" that would result in an annual decline of $ 3 billion in revenues for the medical device industry.  Batelle utilized a quantitative economic technique called an "Input-Output Model" that measures the interdependency between different sectors of the national economy.  This model measures the output of one industry in relation to the input to another.  The model assumed that an estimated 10,000 jobs would be lost in medical devices, and 29,000 in other sectors.  But the question must be asked whether this model is valid in analyzing changes based purely on a hypothesis, and as many of you know, a hypothesis is nothing more than a mere assumption or guess.  Don't believe it, just ask the geniuses at AIG. In addition, there are severe deficiencies between perception and action. 

Case in point.  When Stryker announced plans to layoff 5% of its workforce they cited the excise tax.  Yet, they also stated that their aims of restructuring was "to allow for continued investment in strategic areas and drive growth despite the ongoing challenging economic environment and market decrease in procedure."  The immediate response, critics jumped on blaming the excise tax. The reality is that whether you believe it or not, or have drank the kool-aid, layoffs in 2011 had nothing to do with a proposed device tax in 2013.  What it comes down to is math, you know the subject that most American children despise.  If you increase coverage for 33 million people, will there or won't there be opportunities to increase revenues? Of course if you're Lukianov, you are concerned that young people will not increase your revenues because their needs for spinal implants are minimal compared to the elderly.  How can you argue that the tax will have a negative influence on innovation?  The Medical Device Industry is driven by the following factors;

• Financial Incentives
• Demanding, Uneducated, and Price Insensitive Patients
• A Supportive Investment Community (where else can you find these margins)
• Regulatory Requirements
• Physical and Human Resources

The reason medical device innovation has slowed over the years may be attributed to a combination of  factors such as stricter regulatory requirements, insurance companies denying coverage, and a real lack of innovation.  Don't believe it, just look at Precision Spine, aka a wolf of a different cloth.  You know Jim Pastena can walk around telling himself its innovation, sooner rather than later he believes it. What have you seen lately?  Line extensions?  Product modifications? More "me-too" products?  The reality is that the system is broken and its not the fault of one party, all parties are accessories to a broken system and must be held accountable.  TSB knows why you're angry and frustrated.  Happy Days just don't exist anymore. You have bilked the system and you don't want things to change, you want them to stay the same.  TSB understands, no one likes downsizing from a Porsche to a Chevy do they?

Are there certain provision in the tax that need modifications?  You bet.  But we will never resolve these challenges if we do not sit down and negotiate.  The spine industry is great at deal making, but sucks at negotiating.  At the end the industry can be proactive or reactive, its up to you.

Next Week:  The IRS