Health Care Reform and the U.S. Economy: Now That the U.S. Supreme Court Has Upheld the Constitutionality of the Patient Protection and Affordable Care Act, Bankers Need to Know What It All Means for the Economy and Borrowers

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Although many of its provisions are not yet fully implemented, the Patient Protection and Affordable Care Act (PPACA) already has had a tremendous and measurable effect on the economy. As its provisions continue to be adopted, a number of industries will be affected, including medical device manufacturers, health insurance providers, pharmacies, and hospitals.

Clearly, health care reform offers risks and opportunities in a number of industries. Lenders must be able to evaluate them all to gain an advantage within this rapidly changing sector.

Despite some governors' vows to block implementation of reforms in their states, most health care industries will benefit from a significant broadening of the eligibility criteria for enrollment in Medicaid. The Medicaid expansion enables most individuals with incomes of less than 133% of the federal poverty level to enroll in Medicaid. Also, the mandatory insurance requirement and greater availability of health insurance through health benefit exchanges will ensure that more people have access to health care.

Indeed, this increased access to care may be positive for some medical product manufacturers and health care providers. Nevertheless, risks remain, and it is important to evaluate each affected industry to determine its performance in the long run. By knowing the effects health care reform will have on medical device manufacturers, insurance providers, and other related industries, lenders can better comprehend and benefit from the changing market.

Medical Device Manufacturers

The PPACA's tax on medical device manufacturers has been in the spotlight for a while. In February 2012, the Internal Revenue Service issued long-awaited proposals for regulations regarding the excise tax imposed on medical devices. The tax, which applies to the sale of certain medical devices by manufacturers and importers, is 2.3% of the sale price and will apply to all devices sold after December 31, 2012. Currently, taxable medical devices are defined as any devices intended for human use. The proposed regulations clarify which medical devices are taxable, specifically exempting eyeglasses, contact lenses, and hearing aids. The medical device tax applies to all manufacturers, regardless of size and revenue.

The excise tax will cost the industry an estimated $20 billion over the next 10 years, placing more strain on the innovation system for medical technology. These added costs could affect the willingness of investors to back startup companies seeking to commercialize new technologies. Lenders should consider these factors when dealing with device manufacturers.

Comparative Effectiveness Research

Another major PPACA provision that affects medical device manufacturers is comparative effectiveness research (CER)--the generation and synthesis of evidence to evaluate the benefits and possible harm of various methods to prevent, diagnose, treat, and monitor clinical conditions or improve the delivery of care.

In the beginning of fiscal year 2010, the American Recovery and Reinvestment Act of 2009 provided funding for the PPACA's newly mandated and immediately effective CER entity, the Patient-Centered Outcomes Research Institute (PCORI). By sponsoring scientifically rigorous CER studies, PCORI plans to assist patients, clinicians, payers, and policy makers in making informed health care decisions by advancing the quality and relevance of evidence. This funding has expanded substantially. Totaling $10 million in 2010, it rose to $50 million in 2011 and is estimated to increase to $150 million in 2012. From 2013 to 2019, the institute will likely be funded through an annual appropriation of $150 million, to be sustained by fees imposed on Medicare and private health insurance companies.

CER has significant implications for pharmaceutical, biotechnology, and medical device manufacturers. …