The landmark healthcare legislation Congress passed in March 2010 promises to boost research and innovation, but paying for those programs may mean medical device manufacturers take a hit to their bottom lines (see sidebar "Paying for reform"). The more than 2000-page "Patient Protection and Affordable Care Act" offers new sources of funding for researchers and small- to medium-sized R&D firms. Among the provisions to assist R&D is a tax credit for companies that develop technologies or techniques to diagnose, treat, or prevent disease. Other initiatives support comparative effectiveness research and give the green light to the Cures Acceleration Network (CAN), a program to rapidly translate innovative laboratory research to clinical settings.
Helping small R&D
The Qualifying Therapeutic Discovery Project tax credit, championed by Sen. Robert Menendez (D-NJ), is aimed at companies with fewer than 250 employees. These businesses can claim up to 50% of R&D expenses related to:
- Treating or preventing diseases/conditions by conducting preclinical activities, clinical trials, and clinical studies, or carrying out research protocols, to secure approval by the U.S. Food and Drug Administration;
- Diagnosing diseases/conditions or developing diagnostics based on the molecular activity associated with a disease/condition that would help guide therapeutic decisions; or
- Developing a product, process, or technology to further the delivery or administration of therapeutics.
Making reference to molecular diagnostics in the legislation suggests Congress is getting the message about the new paradigm of personalized medicine and bodes well for optical technologies.
The tax credit also permits companies to apply for a grant in lieu of the credit. This option could be beneficial to early-stage companies that may not have taxable income that can be offset by a credit. The program is expected to get underway by the end of May 2010.
Over the last five years comparative effectiveness research has been hotly debated. The recent stimulus funding awarded to the National Institutes of Health (NIH) included provisions to identify which procedures, technologies, and services provide the best patient outcomes. The healthcare reform legislation now establishes the Patient-Centered Outcomes Research Institute (PCORI) to examine an array of services and procedures to determine which ones work best at preventing, diagnosing, and treating disease.
The PCORI will develop a national research agenda based on a number of factors including disease prevalence and the potential for new evidence that might improve patient health. Expert advisory panels drawn from academia, government, and industry will assist in clinical trial design and supply technical support in the case of device studies. By 2015 PCORI's budget is expected to top out at $600 million a year.
Jennifer K. Barton, director, division of biomedical engineering at the University of Arizona, sees inclusion of comparative effectiveness in the healthcare legislation as a boon for laser medicine. "Especially in emerging areas, the healthcare bill will motivate large-scale serious studies comparing different approaches." She cites a recent pilot study in which photobiomodulation, a technique that uses low-level light to moderate pain, stimulate nerves, and heal wounds, was found to be less costly and had fewer side effects than drug therapy.
Turning discoveries into therapies
The Cures Acceleration Network (CAN), first introduced by Sen. Arlen Specter (D-PA) in 2009, could turn out to be a bonus for researchers and advocacy groups. CAN will award grants through NIH to biotech companies, universities, and patient advocacy groups to bridge the gap between basic scientific discoveries and their application as clinical therapies.
Through CAN, the federal government will pursue more high-risk, high-reward research and should be able to move that research to clinical trials and patients more quickly than through traditional mechanisms. CAN projects will also get fast-track treatment through the FDA approval process. The legislation calls for an oversight board that includes key stakeholders from medicine, medical instrumentation, basic research, pharmaceuticals, patient advocacy organizations, and agencies outside of NIH. To support CAN, Congress has authorized $500 million, with a ceiling for individual project awards set at $15 million.
Now that the debate and political posturing has quieted, the work of implementing healthcare reform begins. The legislation describes very specific timeframes for initiating programs and in some cases eliminating them. The reforms discussed in this article do have the potential to improve patient care. However, as with many big-ticket programs (think Superconducting Supercollider) that Congress authorizes, over time the costs are often too great to sustain and the benefits are never realized.
Paying for reform
The Congressional Budget Office estimates that changing the healthcare landscape will cost more than $900 billion over the next decade. Some of that money will be generated by taxes on medical device manufacturers. Specifically, the medical device company excise tax provision as authorized imposes a tax of 2.3% on the sale of any taxable medical device and would be effective for sales after Dec. 31, 2012.
The tax is structured so that $20 billion would be generated by 2019. This tax would be levied regardless of company size. All Class I, II, and III devices would be taxed. The only exemptions would be for retail products.
Mark Leahy, CEO of the Medical Device Manufacturers Association (MDMA), notes that because the tax is based on a company's total sales and not its profits many small firms could suffer. "This tax could cause firms to lay off staff, cut R&D budgets, and move their operations overseas," he says. "This could be a deterrent to keeping jobs in the U.S."
MDMA is working with the National Venture Capital Association to restructure the tax to provide a graduated scale related to company size: no tax on sales between $0 and $100 million; and 50% of the applicable tax assessed on revenues between $100 million and $150 million. Revenues over $150 million would be subject to the full rate. In a letter outlining the alternative tax structure, MDMA, NVCA, and the Advanced Medical Technology Association noted that "less than one-third of the public medical device companies with less than $150 million in annual revenue are profitable, and most of those are only recently profitable. The percentage of private companies is likely far smaller, since they are generally less profitable."
Adds Leahy, "Medical devices normally mean innovation and jobs creation. [The medical device tax] is one area where there will be unintended consequences."