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Affordable Care Act Endangers Innovative U.S. Life Sciences Industries

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The Patient Protection and Affordable Care Act (ACA) is in the news again, with the announcement that the White House has delayed until 2015 the employer mandate, which requires that all employers with more than 50 employees provide health coverage to their workers. While most of the attention toward the ACA has centered around debate regarding the individual and employer mandates, what’s often missed is that certain provisions in the Affordable Act Care threaten to damage two of America’s most important innovative life sciences industries: medical devices and biopharmaceuticals.

Regarding medical devices, as of January 2013 the Affordable Care Act began to impose a 2.3 percent excise tax on the sales of medical devices, in order to offset a portion of the $1 trillion cost of the Act. (Specifically, the Joint Committee on Taxation estimates the tax will collect $29 billion over the 2013-2022 period.) Beyond the fact that raising costs is not the way to control them, the provision has had a deleterious impact on the competitiveness of U.S. medical device firms and threatened employment in the U.S. medical device industry. Some, including former chief Labor Department economist Diana Furchtgott-Roth, have warned that the tax could cost as many as 45,000 medical device industry jobs, potentially impacting up to 10 percent of the approximately 400,000 jobs in the U.S. medical device industry. Indeed, medical device manufacturers Welch-Allyn, Stryker, and Smith & Nephew, among others, have attributed recent layoffs, at least in part, to the medical device sales tax and to broader “uncertainty surrounding the future” of the ACA. Beyond the deleterious employment effects, the tax raises the across-the-board cost of medical devices to patients and consumers, leading to inferior health outcomes. In fact, the Office of the Actuary for the Centers for Medicare and Medicaid Services has stated that the medical device tax will ultimately increase national health care expenditures. Health care providers, hospitals, doctors, patients, and insurers will bear much of the additional cost of the tax, but as the National Center for Policy Analysis concludes, “To the extent that device makers are unable to pass on their additional costs, innovation and medical device workers will suffer.”

America’s biopharmaceutical firms comprise another life sciences industry threatened by provisions in the Affordable Care Act. Recognizing the significant expense and time required to develop innovative biologic medicines (on average entailing at least $1.2 billion in pre-approval R&D and 14.6 years in the development pipeline), Congress on a bi-partisan passed the Biologics Price Competition and Innovation Act (BPCIA), which affords 12 years of data exclusivity protection for novel biologic medicines. Data exclusivity protects the actual investment needed to prove the safety and efficacy of a biopharmaceutical product, ensuring that the costly clinical trial results and data developed by the biologics’ innovator during the drug approval process cannot be used (during the 12-year period ensuing drug approval) by competitors seeking to secure approval for a third-party product.

The BPCIA actually became enshrined as U.S. law as part of the Patient Protection and Affordable Care Act. Unfortunately, in the interest of cutting costs by speeding the arrival of generic copies of innovative biologic drugs, the Obama Administration’s 2014 Budget Proposal proposes “to award brand biologic manufacturers seven years of exclusivity, rather than 12 years under current law.” The Administration notes that, “this proposal will result in $3 billion in savings over 10 years to Federal health programs including Medicare and Medicaid.”

Perhaps even more concerning—especially given the seven years of data exclusivity protection the Administration seeks as part of its 2014 budget proposal—is that U.S. trade negotiators have not staked out a clear position that they are seeking 12 years of data exclusivity protection in trade agreements the United States is currently negotiating, notably the Trans-Pacific Partnership (TPP), which enters its pivotal 18th round of negotiations in Kota Kinabalu, Malaysia on July 15. But as ITIF writes in Ensuring the Trans-Pacific Partnership Becomes a Gold-Standard Trade Agreement, providing 12 years of data exclusivity for biologics recognizes the need to maintain adequate incentives for biologics makers to invest in uncertain R&D activities while at the same time making room for competition by creating a path for biosimilar manufacturers to bring biosimilars to market. (Considering this issue, the U.S. National Academies of Science and Engineering’s Rising Above the Gathering Storm report likewise notes that, “It’s critical that a balance be struck in finding an appropriate period of exclusivity such that innovation is stimulated and sustained but patients have access to generic-drug-pricing structures” and suggests this data exclusivity period should be at least 10 to 11 years.)

A week before the 18th round of TPP negotiations begin, U.S. and European trade negotiators will launch the first round of negotiations toward a Transatlantic Trade and Investment Partnership (T-TIP). No doubt the subject of data exclusivity for biologic medicines will come up as well during those negotiations, and the Europeans will be bringing to the table their language effectively providing 11 years of data exclusivity. (Technically, the European Union provides a 10-year data exclusivity period and an eleventh year of data exclusivity for significant new indications that are approved within the first 8 years after approval.) With the issue of data exclusivity a critical issue in both the TPP and T-TIP negotiations, U.S. negotiators should take the opportunity now to stake out a clear position, based on existing U.S. law, supporting 12 years of data exclusivity for innovative biologics.

As ITIF argues in Leadership in Decline: Assessing U.S. International Competitiveness in Biomedical Research, for a number of reasons the health of U.S. life sciences industries cannot be taken for granted. First, competitor nations have committed to substantially increase investments in life sciences research at a time when U.S. funding for life sciences research is at best stagnating and at worst, given the recent sequestration, decreasing. In fact, if current trends in biomedical research investment continue, the U.S. government’s investment in life sciences research over the ensuing half-decade is likely to be barely half that of China’s in current dollars and roughly one-quarter China’s level as a share of GDP. Second, other nations are actively trying to redesign their policy environments to maximally support biomedical innovation. For example, the United Kingdom is expanding incentives for private-sector life sciences investment, including through its introduction on April 1, 2013 of a “patent box,” a measure which will reduce corporate taxes on profits from patents to 10 percent. In other words, while the United States is increasing the taxes it applies to innovative life sciences industries, the United Kingdom is decreasing its.

The U.S. life sciences industry is a key source of both broader U.S. economic competitiveness and high-wage jobs. In fact, the industry supports a total of more than 7 million jobs and contributes $69 billion annually to U.S. gross domestic product. But there has been an alarming decline in venture capital investment into innovative American life sciences industries. In fact, according to PriceWaterhouse Coopers, the number of new biotechnology and medical device companies receiving start-up financing has fallen to the lowest level in 18 years. Even the President’s own Council of Science and Technology Advisors has acknowledged that private investment in new drug innovation “is under significant stress.”

Unfortunately some of the provisions of the Affordable Care Act, including the medical device tax and proposals to limit both data exclusivity and the ability of brand-name drug manufacturers and generic competitors to settle patent disputes through out-of-court settlements, are contributing to the problem. As Investors Business Daily argues, such policies “take direct aim at the intellectual property protections that provide investors with the confidence and predictability needed to support medical innovation.”

In conclusion, the Affordable Care Act appropriately seeks to achieve a number of laudable goals, including reducing health care costs and expanding access to health care for all Americans. But it should seek to realize these goals through genuine innovation and productivity gains—such as by deploying health IT systems and using the power of information to accelerate medical research—not by raising taxes or cutting costs in ways that threaten the innovative potential of key U.S. life sciences industries. It’s time to repeal the medical device tax and to defend 12 years of data protection for innovative biologic medicines.

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About the author

Stephen Ezell is vice president, global innovation policy, at ITIF. He focuses on innovation policy as well as international competitiveness and trade policy issues. He is coauthor of Innovating in a Service-Driven Economy: Insights, Application, and Practice (Palgrave MacMillan, 2015) and Innovation Economics: The Race for Global Advantage (Yale, 2012). Ezell holds a B.S. from the School of Foreign Service at Georgetown University.
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