Obamacare, the Medical Device Excise Tax, and Manufacturing Innovation

Metrology and politics are rarely the topic of conversation in the industrial measurement world. Leaving political affairs to Washington, our focus is helping manufacturers find more efficiency in their manufacturing, assembly, and quality control processes. However, in the case of the medical device excise tax, we will make an exception.

The medical device excise tax is a component of the 2010 Affordable Care Act, also known as Obamacare, assessing a 2.3% levy on medical devices sold in the United States. This tax is applied to everything from artificial knees to surgical gloves to wheelchairs, whether produced domestically or internationally. The Medical Device Manufacturers’ association lobbied hard for repeal of this tax, arguing it would be “devastating to innovation, patient care, and job creation.” The association suggests that since the provision applies regardless of whether the company generates a profit, some medical companies would theoretically owe more in taxes than they generate from their operations. Central to the opposing view is the warning that device companies will respond to these taxes by restructuring operations, thereby cutting jobs and having less money for innovation.

The other side of the argument is made by advocates and think-tanks such as the Center on Budget and Policy Priorities, maintaining the tax applies equally to imported and domestically produced goods, and does not provide an incentive to ship jobs overseas. The center further argues the industry is dominated by a relatively small number of firms that make up the majority of the estimated $106 billion to $116 billion per year in industry revenue. The Massachusetts Medical Device Journal reported, “The 10 largest medical device makers would have generated 86% of the $1.87 billion in excise taxes last year, had the healthcare reform law been in effect.”
 

Now What?

This discussion will not weigh the value of the medical device tax one way or the other, but will build a case around the unintended consequences of the tax. The current situation presents a prime opportunity to unleash a wave of manufacturing innovation in the medical device market to drive down the cost to produce products. Our position hinges on a statement in the Center for Budget and Policy Priority’s position paper, in a section called Tax Will Have Minimal Effect on Consumers: “Device manufacturers generally do not hold enough market power to pass on the entire excise tax to consumers through higher prices. For some common medical devices (for example, heart valves and hip and knee replacement parts), buyers have several available alternatives and can negotiate for a favorable price.” To a large extent, health care in America is purchased based on reimbursement rates set by the U.S. government through Medicare and Medicaid. The argument about the lack of pricing power helps explain the Medical Device Association’s opposition to the tax – unless innovation drives down costs, the tax will drive down profits.
 

Room for Innovation

Manufacturing innovation can open the door to new efficiencies in product development, and in most cases, the technologies already exist. As an original equipment manufacturer (OEM) of dimensional quality control products serving more than 100 industries, Hexagon Metrology has unique exposure to typical industry practices across an enormous cross-section of the manufacturing community. Over time, our observations revealed the medical device manufacturing industry is one of the least innovative in the deployment of advanced technologies in measurement and inspection.

The lack of innovation can be explained by the FDA’s 21 CFR.820 regulations. This set of rules (more than 7,000 words) defines the Quality Systems guidelines for medical devices. Clearly, it is desirable for the regulatory body to set forth requirements for quality control of medical devices. In many ways, the CFR.820 regulations do allow for flexibility on the manufacturer’s part. According to the FDA, the regulation “provides the framework that all manufacturers must follow by requiring manufacturers to develop and follow procedures, and fill in the details that are appropriate to a given device according to the current state-of-the-art manufacturing for that specific device.” In practice, the quality procedures developed in response to these regulations can discourage innovation in manufacturing processes because implementing a new production or inspection technique involves revising all the regulatory paperwork. It is simply easier to continue with the status quo, even if the status quo is by nature outdated and inefficient.

It is this mindset that drives medical device companies to continue purchasing outdated technologies, like optical comparators, year after year. The quality procedure says to inspect the part in this manner, so it does not matter if there are better, faster, and more accurate ways to do it. Consequently, the excise tax may possibly drive medical companies to look for efficiencies everywhere they can find them, including the quality control department. This emerging trend could finally break the logjam on the use of 1920s vintage technology like optical comparators to inspect medical devices.

To be fair, there are device manufacturers utilizing advanced inspection technologies such as our Brown & Sharpe Global scanning CMMs to scan the contours of an artificial joint automatically. The orthopedic market for implantable devices, such as artificial joints (hips and knees), spine implants, trauma implants like bone plates and screws, and surgical tools, is generally at the forefront of employing advanced technologies, in large part because of the complex three-dimensional contours of these parts.
 

Driving Improvement

Is there a roadmap to improvements in manufacturing that will produce lower costs for medical devices? You bet there is. These four general principles can guide the medical device industry to upgrade its dimensional inspection techniques for positive bottom-line results:

1) Remove qualitative inspection methods wherever possible – Qualitative inspection relies on the opinion of an inspector to confirm if a part complies with specifications. This method of verification has largely disappeared from many manufacturing industries. Using modern inspection solutions and techniques, part features such as dimensions, surface finish, and color can be quantitatively evaluated.

2) Eliminate manual inspection methods – Qualitative inspection is inherently manual, which translates to manpower and unpredictable cycle times. Older technologies, such as most optical comparators that require an operator to inspect each part manually even if the results are quantitative, are candidates for greater efficiency gains through automation.

3) Automate inspection – Computer-controlled coordinate measuring machines and automated vision inspection systems represent the state-of-the-art method to quantitatively evaluate the dimensions of nearly any part – medical or otherwise – to the original design intent. A wide variety of sensor technologies including camera-based vision, laser, chromatic white light, and tactile scanning can be employed in a programmatic, automatic inspection. In many cases, multiple parts can be staged on a machine and inspected in sequence automatically. Quantitative inspection results for each part, as well as statistical aggregate results, can be automatically collected to determine both individual part conformance and the capability of the manufacturing process as a whole. Gaining a better understanding of process capability and process drift can dramatically lower manufacturing scrap rates.

4) Leverage CAD models for inspection – Our application engineers are astonished to find many quality control departments do not use CAD models to inspect medical parts. A CAD model represents the ideal part and is the perfect reference to compare a part to its original specification. Most manual inspection systems – and some automated technologies – cannot or do not fully exploit the capability of CAD for inspection. Our automated CMMs and vision inspection systems run a single CAD-centric inspection software platform PC-DMIS. Sophisticated measurement software is capable of programming and running inspection routines directly from the native CAD file. Utilizing the original CAD file preserves the version traceability of the design throughout the manufacturing to inspection. A CAD model with embedded geometric dimensioning and tolerancing (GD&T) data automatically communicates its design intent to drive the planning for inspection. The effective deployment of CAD with automated systems for inspection yields faster and more reliable programming, quantitative measurement results, and shorter, measurable cycle times.
 

Opportunity Knocks

The medical device excise tax, like it or not, is a reality. The medical device industry built itself by pioneering innovative therapeutic solutions to medical problems. How does this industry preserve profits in the face of the medical device excise tax? The solution may be “physician, heal thyself.” By applying existing inspection technologies to many manufacturing processes, these companies can significantly improve cycle times and process control, reduce part scrap, and ultimately shrink product costs.

Hexagon Metrology Inc.
North Kingstown, R.I.
www.hexagonmetrology.us

About the author: William Fetter is the director of marketing and communications for Hexagon Metrology Inc. Fetter can be reached at william.fetter@hexagonmetrology.com.

Sources:
Center on Budget and Policy Priorities Position: http://bit.ly/1biPmJ0

Medical Device Manufacturer’s Association Position: http://bit.ly/17jPyo4

Massachusetts Medical Devices Journal Study: http://bit.ly/1atfi3N