Medical Device Industry: 3 Ongoing Challenges

Spinal Tech

Katherine Lin and Payal Keshvani are associates with McGuireWoods LLP law firm in Chicago. Ms. Lin and Ms. Keshvani's practices focus on healthcare transactional and regulatory matters for healthcare providers, including ambulatory surgery centers, hospitals and dialysis centers.

Here Ms. Lin and Ms. Keshvani elaborate on three pressing challenges for the medical device industry.

1. Medical device tax. Beginning in January, a 2.3 percent tax will go into effect for gross medical device sales, which equates to a 15 percent tax on profits from medical devices. The tax was put into place because government officials believed the Patient Protection and Affordable Care Act would create an influx of new patients which would offset the tax's burden to companies while creating additional federal revenue, Ms. Keshvani says. However, it could potentially be a barrier to companies, particularly start-ups, because even an increase in patient volume would leave companies struggling to comply with such a high tax rate.

This new source of government income is being challenged by lawmakers from both parties who don't believe the theory of untapped volume of customers will hold up in practice.

Device tax implementation also creates an uncalculated transaction cost of understanding what the tax means for the entire industry, Ms. Lin says. The language of the law is very broad and does not make it clear exactly to whom or what the tax will be applied.  

"A company may not have somebody in house exclusively to deal with cutting edge regulatory problems," she says. "It's an additional cost that maybe the people who supported the law didn't account for."

Many companies are threatening layoffs or closing facilities, saying the tax will increase their costs and the cost to the patient. For instance, orthopedic device manufacturer Stryker announced in November of 2011 it would layoff 5 percent of its workforce by the end of 2012 to "provide efficiencies and realign resources in advance of the new Medical Device Excise Tax scheduled to begin in 2013." Stryker will lay off approximately 1,000 employees before the year's end.

Critics also say the tax discourages new innovation overall. Industry lobbyists are seeking an appeal to the law.

2. 510(k) FDA clearance process. Changes have been made to the FDA's 510(k) clearance process for medical devices, among which the process' fees will be 17 percent higher for companies seeking premarket approval. The FDA has also broadened the definition of who needs to apply for regulatory control and approval so more people have to register and go through the process.

The regulatory agency is attempting to better manage device recalls if devices fail post approval with these new regulations. The process will assign a device indicator with a batch and lot number to allow devices to be recalled much quicker.

"There are advantages for the FDA, but it also gives the FDA more control post market," Ms. Keshvani says. "They'll have their hands in something where previously, once a device was approved, you wouldn't see FDA control again."

As per device industry negotiations, the updated clearance process will also aim to shorten the amount of time it takes to receive premarket approval. In 2013 a 510(k) approval should be reduced to 135 days with the goal of getting to 124 days by 2017.

"Although it doesn't seem like a huge difference, 11 days gets more things running and gets rid of the backlog in the FDA," Ms. Keshvani says.

Critics are wary of increased FDA involvement and argue that the clearance process does not adequately evaluate the safety or efficacy of a device because it is based on a previously released device. They believe increased control will stifle innovation.

3. Increased costs. Uncertainty over regulatory issues clouds the future of the medical device industry right now. Some professionals believe there are now so many costs to operating a device company that unless you have a product that will bring a large payoff, it may not be the time to break into the industry, Ms. Lin says.

"If you are a small company looking to bring a device in, now is the time for something groundbreaking, something other than just incremental improvement," she says.

The challenge will be to become as cost-effective as possible and bring the most value to the consumer. Companies able to accomplish those two overarching goals have the greatest chance for success.

The market for medical devices is changing, and device companies should be aware of this going forward, Ms. Lin says. As more physicians align with hospitals, medical device companies may see differences in what potential purchasers look for in products and how they approach supply chain relationships.

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Bioventus Leases $5M Office, Creates 44 Jobs

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