HIGPA: Taxes and Transparency

Journal of Healthcare Contracting readers may be aware that one provision of the recently passed Patient Protection and Affordable Care Act (the healthcare reform law) calls for a 2.3 percent tax on the sale of medical devices. Could the tax have been avoided if the industry were more transparent? After all, the medical device industry was successful in reducing the overall tax from $40 billion to $20 billion over 10 years. And by the time President Obama signed the sweeping measure into law, the tax had been reduced from a 2.9 percent excise tax to a 2.3 percent excise tax on gross receipts. The question is, did the lack of price transparency in the medical device industry play a factor in their higher taxes?

Pricing transparency has been a big issue in the healthcare supply chain. Group purchasing organizations are one of the most – if not the most – transparent segments of the supply chain. Administrative fees must be in writing and disclosed to GPO members at least annually. Hospitals and other healthcare providers must disclose payments from GPOs on their annual cost reports. In addition, all of this information is available upon request from the Secretary of Health and Human Services.

The Healthcare Group Purchasing Industry Initiative (HGPII) recently developed and adopted a strong code of conduct, which increases transparency and accountability and helps maintain the highest ethical standards. In fact, anyone can go to the public website (www.healthcaregpoii.com) and examine the business practices of each of HGPII’s members. The medical device industry also has a code, but does not regularly post their business practices on a website. A few medical device manufacturers, however, have begun posting some of their relationships with physicians, as a part of corporate integrity agreements with the Department of Justice.

Medical device makers did go on record in support of the Physician Payment Sunshine Act (provisions of which are included in the healthcare reform law), which requires manufacturers to disclose payments to physicians when they are in the form of research grants, consulting agreements, compensation, gifts, education and other services. (See this month’s Observation Deck.) The group purchasing industry also supported the “sunshine” provisions of the law.

Clearly, no one likes high taxes. In fact, when Congress first proposed a tax on medical devices, the group purchasing industry asked Congress to construct a policy that would prevent this particular tax from being passed on to hospitals, nursing homes and other healthcare providers. This is because these providers had already agreed to major cuts in reimbursement as a precondition to healthcare reform. To this end, group purchasing organizations requested that if Congress did enact such a tax, it do so in 2013 (which it did) and in the form of a gross receipts tax, as proposed in the Senate bill (which it failed to do). These concerns now appear especially prescient.

A recent poll conducted by the Medical Device Industry Council (MassMEDIC) suggests that healthcare providers should indeed be worried. In response to the device excise tax, 90 percent of surveyed firms said they would reduce costs and 80 percent said they would increase prices. But only about half said they planned to decrease spending on research and development, and only 40 percent expected a reduction in profits. In addition, the industry appears to be gearing up for a future effort to repeal this tax. Should medical device companies attempt to pass on the cost of this tax to their customers, hospitals and other healthcare providers? The device industry has made it clear it will continue to fight this tax, and GPOs will continue to fight higher costs for hospitals and patients.

Regarding transparency, hospitals should insist that medical device manufacturers remove “gag clauses,” which prevent them from sharing and comparing pricing data. Device makers have a history of enforcing contractual clauses between themselves and their hospital partners when it comes to the issue of comparing prices. They have taken this issue to court more than once.

Removing gag clauses would introduce a new level of competition into the market that has until now gone unseen. While such an action wouldn’t prevent medical device companies from passing on the new tax, it would at least ensure that hospitals aren’t forced to blindly negotiate contracts in the dark. It would provide a check on hospitals overpaying on the devices they purchase at a time when so many of them are in the red. If this course of action doesn’t work, it is only a matter of time before Congress gets involved. Thomas Jefferson said that “the price of freedom is eternal vigilance.” Here the price of freedom (from at least taxes) may be greater transparency.

About the Author

Curtis Rooney

Curtis Rooney is president of the Healthcare Supply Chain Association, www.supplychainassociation.org