Xconomist of the Week: Rapundalo on How the Affordable Care Act May Thwart Innovation

3/15/12Follow @XconomyDET

Stephen Rapundalo, head of the industry association MichBio, has been spending some time on Capitol Hill recently lobbying Michigan’s congressional delegation to repeal parts of the Affordable Care Act, which he says will have a chilling effect on innovation in Michigan’s nascent medical device sector.

Along with representatives from 18 other states’ med-tech associations—including the heavy hitters in California and Massachusetts—Rapundalo is trying to raise awareness about the medical device tax and the renewal of the Medical Device User Fee Act (MDUFA). The “fly-ins” are part of a coordinated lobbying effort by the State Medical Technology Alliance.

Rapundalo says the problem with the medical device tax is that it imposes a 2.3 percent excise tax on the revenues of all medical device companies, whether they make toothbrushes or cardiac stents—and whether or not the companies can afford it.

“The medical device excise tax has very broad implications for innovation and the sustainability of medical device manufacturers in Michigan,” Rapundalo explains. “The tax doesn’t recognize the difference in business models between pharma and medical devices. Medical devices are more like commodities, purchased by hospitals, for example, and I don’t think it’s fair to levy an excise tax.”

Rapundalo says the medical device tax has already put the brakes on innovation in Michigan as companies scramble to reduce costs—which usually involves cuts to R&D—so they’ll have the money when the first tax bill comes due on January 1, 2013. Stryker, the Kalamazoo, MI-based global medical device giant, pre-emptively cut its worldwide workforce by 1,000 people last fall, which Rapundalo says was in preparation for paying the excise tax. Another possible outcome he predicts is that companies will look at moving their operations to lower-cost areas overseas.

Rep. Erik Paulsen, a Republican from Minnesota, has introduced a bill to repeal the medical device tax and has so far collected 228 sponsors in the U.S. House of Representatives—predictably, as with all matters related to the Affordable Care Act and taxation, the support is heavily partisan. Rapundalo believes all of Michigan’s Republican members of Congress have signed on in support. Attempts to reach members of Michigan’s U.S. House Democratic caucus for comment were unsuccessful by press time.

The medical device tax is worth $20 billion in Affordable Care Act funding, and Rapundalo says he understands that the medical device industry must pay its part, just as pharma and the insurance industry must pay theirs. Rapundalo says he’s spoken to Democrats who say they understand the medical device industry’s challenges, and he and others in the lobbying coalition that descended on Washington, D.C., earlier this month claim they’re willing to work with those Democrats to find the $20 billion elsewhere.

“[Those who support the repeal of the medical device tax] are keenly worried about innovation and the United States’ ability to maintain competitiveness,” Rapundalo adds. “With less money to put back into R&D, patents are shortchanged and we don’t get access to new technology as soon as other parts of the globe.”

The second issue keeping the medical device industry awake at night is the the renewal of the MDUFA, which creates a new user fee agreement negotiated between the medical device industry and the Food & Drug Administration (FDA). It spells out how companies will pay for their product-approval submissions, as well as the timeline the FDA has to conduct those product reviews. Rapundalo says the medical device industry is “pretty happy” with what’s been negotiated—more stringent terms for “pay-for-performance” expectations—and is lobbying to have the MDUFA renewal signed into law by the summer.

“Although the fee is higher, there’s a greater importance on the FDA acting quickly and how we measure approval time,” Rapundalo says, explaining that, in the past, the clock for approval has started as soon as a product lands with the FDA, which calls time-out when regulators send questions about the product back to the medical device company. “The industry cares about total approval time, not stopping and starting the clock. By instituting a global time clock, we hope approvals will be done more quickly but without compromising safety.”

Rapundalo notes that the U.S. already lags significantly behind Europe in terms of regulatory approval of medical devices, which causes many medical tech companies to launch their products in foreign markets before they launch them domestically—another disadvantage for American patients.

However, Rapundalo says neither of these issues is truly about health care. “Really, these are issues of economic development and tax reform,” he adds, especially in states like Michigan that are counting on innovative sectors like medical devices to help resurrect their economy. “We can’t talk out of both sides of our mouth.”

Sarah Schmid is the editor of Xconomy Detroit. You can reach her at 313-570-9823 or sschmid@xconomy.com. Follow @XconomyDET

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