• Medtech Regulatory Changes 2010: The Landscape Continues to Shift
  • January 27, 2011 | Author: Gina M. Kastel
  • Law Firms: Faegre & Benson LLP - Denver Office ; Faegre & Benson LLP - Minneapolis Office
  • Medical technology companies faced a wide range of regulatory and compliance changes in 2010 that will impact their operations in the coming years.

    Federal Health Care Reform

    One of the most significant developments of 2010 was the enactment of the federal Patient Protection and Affordable Care Act of 2010, as modified by the Health Care and Education Reconciliation Act of 2010 (the Health Care Act). This legislation contained several provisions of interest to medical technology companies. 

    Excise Taxes.  The Health Care Act includes a provision imposing a 2.3 percent excise tax on sales of medical devices by manufacturers, producers, and importers. Taxable devices include all medical device defined in section 201(h) of the federal Food, Drug, and Cosmetic Act and intended for use by humans, with limited exclusions for devices purchased by the general public at retail for individual use, such as eye glasses. There is no general exclusion for class I medical devices, so these devices will be subject to tax unless the Internal Revenue Service identifies the particular device as excluded. If the excise tax is implemented as drafted, manufacturers must begin paying the tax in 2013. There is no exemption for small companies or cap on the tax, though the tax is deductible for federal income tax purposes.

    Physician Payments Sunshine Act.  The Health Care Act also included the Physician Payments Sunshine Act, which had been pending in Congress for several years.  Under the new law, drug and medical device manufacturers, medical supply and biologic companies, will have to report all payments and transfers of value made to physicians and teaching hospitals that exceed $10.  Reported information will be available to the general public.  To the disappointment of regulated companies, the law contained only a limited preemption provision that will not completely preempt similar state laws regulating relationships with physicians and other health care providers. Where the federal law requires reporting of the same information as applicable state law, the state law is preempted.  Where the state statute requires reports of different information, manufacturers will have to comply with both state and federal law.  The administrative burden of complying with the new reporting requirements, which apply to payments made in 2012, could be substantial.

    Comparative Effectiveness Research.  The Health Care Act supports the use of comparative effectiveness research by establishing a nonprofit Patient Centered Outcomes Research Institute to perform such research.  The stated purpose of the comparative effectiveness provisions is to identify priorities for such research and measure clinical outcomes, rather than setting mandates, guidelines, or payment or coverage criteria.  As the amount of comparative effectiveness data and the demand to reduce health care costs both grow, the pressure may increase to use comparative effectiveness data to set reimbursement standards.  Medtech companies will want to monitor the development of comparative effectiveness research and its use in the coming year.

    Therapeutic Tax Credit. The Health Reform Act provided some financial assistance for small to mid-sized companies in the form of tax credits and grants for qualifying therapeutic discovery projects.  While the credits and grants have now been allocated, the companies receiving them will continue to benefit in 2011.

    Changes to 510(k) Clearance Process

    Another significant development relates to the 510(k) premarket clearance process.  On August 4, 2010, the U.S. Food & Drug Administration (FDA) issued a report recommending more than 70 changes to the 510(k) process. At the same time, it issued a second report including recommendations on how the FDA's Center for Devices and Radiological Health (CDRH) could better use science in its regulatory decision making. The reports were the result of a year-long review spurred by concerns that the 510(k) program was not meeting its dual objectives of encouraging innovation and promoting device safety and effectiveness. The key recommendations regarding the 510(k) process include:

    1.Consolidating the definitions of "intended use" (a requirement for substantial equivalence) and "indications for use" (a term used when amending a device label) into a single term ("intended use")
    2.Granting the FDA express authority to consider an off-label use of a device when determining its "intended use"
    3.Changing the landscape for predicates by issuing guidance on when a device should no longer be available for use as a predicate due to safety or effectiveness concerns, issuing guidance as to the appropriate use of "multiple" predicates, and eliminating the use of "split" predicates (e.g., relying on one predicate for the device's "intended use" and another for its technological characteristics)
    4.Creating a new subset of class II devices - "class IIb" - for which manufacturers would be expected to submit additional clinical information to support the substantial equivalence determination
    5.Issuing a regulation to clarify, and perhaps expand, the FDA's 510(k) clearance rescission authority
    6.Requiring the submission of non-proprietary photographs and schematics with the 510(k) application for inclusion in a public database to help prospective submitters distinguish potential predicates. 

    CDRH, 510(k) Working Group Preliminary Report and Recommendations, August 2010. 

    Manufacturers and other industry leaders were given the opportunity to comment on the proposed changes.  Although they universally praised the FDA's effort to increase transparency and reviewer training, there was also widespread concern regarding the volume of proposed changes (more than 70) and the potential cost to implement them.  In addition, the Advanced Medical Technology Association expressed concern that limiting the use of predicates may restrict the range of evidence available to support the safety and effectiveness of a particular device.  Manufacturers also protested the disclosure of detailed device information in a public database, which they say will harm competition and hinder innovation, and argued that the new category of class IIb devices is too broad and the requirements for them too burdensome. Members of Congress also encouraged FDA to proceed carefully to ensure medtech companies can continue to innovate in a "predictable and consistent regulatory environment." 

    On January 19, 2011, the FDA issued an implementation timeline for 25 of the proposed changes and a summary of the next steps in the process. The timeline indicates that the FDA will tackle a number of key issues this year but will wait on some of the more controversial issues (e.g., creation of the class IIb devices) until mid-2011, when the Institute of Medicine releases the results of a separate independent study of the 510(k) process. The timeline and summary are available on the FDA website.

    Fraud and Abuse Compliance Efforts

    The aggressive prosecution of medical technology companies under the federal anti-kickback statute and False Claims Act continued in 2010.  One new development was the criminal prosecution and exclusion of individuals associated with prosecuted companies from participation in federal health care programs, such as Medicare.  In November, the Office of Inspector General (OIG) of the federal Department of Health and Human Services announced it was excluding a former member of the board of directors of a pharmaceutical company for failure to report violations of the law to the FDA.  In another case, three executives were excluded after pleading guilty to misdemeanors related to the misbranding of a painkiller.  None of the individuals in that case admitted knowledge of the misconduct and the government alleged no knowledge.  The OIG took the position that it has the power to pursue exclusion even when the executives have no knowledge of the crime. Exclusion of a company can have significant financial impact, as that will make sales of its products to hospitals and other Medicare-participating health care providers difficult or impossible.

    State Law Reporting

    Several states, including Massachusetts, Vermont, California, and Nevada, now have laws that limit marketing practices and impose reporting requirements on medical device manufacturers.  Companies now must ensure that they have appropriate mechanisms in place to track payments of various types to physicians and that they do not make payments that are prohibited under applicable state law.  Each state's definitions and requirements differ so the task of managing these compliance and reporting requirements is significant for companies operating in multiple states.  The challenge will only grow as additional states consider similar legislation and the federal reporting requirements become effective in 2012.