The Medical Device Excise Tax – Time to Reprioritize Quality

Over the past two months, the near term future for organizations that serve healthcare and are regulated by the US Food and Drug Administration (FDA) has gained much needed clarity. Beginning with Barack Obama being elected to a second term, and more recently with what has been deemed “The Fiscal Cliff” being averted by leaders in Washington, DC in the short term. Now is the time for Medical Device manufacturing companies to seriously plan for the financial impacts of The Medical Device Excise Tax. The Medical Device Excise Tax is a 2.3% sales tax on the revenues of certain medical devices manufactured and sold in the U.S. This tax went into effect on all sales after December 31, 2012; it is in effect now.

At the AdvaMed Conference in October, 2012 (pre-election) in Boston, I had the privilege of listening to a CEO Medical Device Company panel discussion about this Medical Device Excise Tax and these CEO’s strategies.  They described how they would handle this additional tax while continuing to innovate, introduce new products, create jobs and create earnings growth for shareholders and ownership. The discussion was spirited, but one concept was consistent across all these CEO’s regardless of company size; they could not foresee asking their customers to absorb all the impact. Many ideas were bantered around: reorganizations in near term were the most discussed, but one topic never came up. What is the cost of quality in an increasingly regulated, complex global industry like healthcare?

Over the past 90 days, I have had the opportunity to attend high level meetings with several large global medical device and pharmaceutical manufacturers, a major U.S. based airline and a “Cosmeceutical” manufacturer (if this is a new term to you, it refers to a beauty care/cosmetic company that makes claims more like a pharmaceutical; therefore, is beginning to become more regulated by the FDA). I apologize in advance for what may appear an oversimplification; however, the one key difference I have synthesized from these discussions is the Airlines Industry inherently thinks about, plans for and resources building quality into everything they do quite differently than do the Med Device, Pharmaceutical and Cosmeceutical companies.

In my observations, the airline tended to think of planning for, managing and analyzing quality like a strategic imperative; the only way to do business. They would trend and evaluate quality initiatives and challenges at the highest levels and as a function of general and executive management responsibilities. They invested in quality management systems that were strategic and core to the fiber of their business. The Medical Device companies tended to think of quality and regulatory compliance more like a separate department or a cost of doing business; almost a necessary evil.

The airlines industry seemed to think of quality as strategic, and the Medical Device industry seemed to think of quality tactically.

Could this be a difference of how they are regulated? I don’t know the answer to that, but it is worthy of consideration. My strong belief is the mission statements of the Federal Aviation Administration (FAA) and the FDA are much more aligned than not aligned.

In this New Year and considering the financial imperative of the Medical Device Excise Tax, I think it is worth reflection of how does your organization think of quality, the cost of quality and the market changing benefits of better quality. Do you think of quality information and management systems as integral and critical like an Enterprise Resource Planning (ERP) solution or do you manage and evaluate quality with departmental systems and excel spreadsheets? Is every event captured, trended and analyzed for improvement similar to the airline industry, or does your organization react to the current crisis of the day concerning quality and FDA regulations and mandates?

As you consider these questions, please consider:

- Under 21 CFR Part 820.20, device manufacturers must establish management controls, including active participation from executive management, to ensure that an effective quality system has been established and maintained. How aligned are your senior management teams?

- Has your organization taken a global integrated one-view of quality or do isolated silos of meaningful visibility still exist?

- How is quality funded? Like an investment or a departmental cost?

- Is quality a strategic asset at your organization or a cost of doing business?

- Is quality integrated and proactively analyzed and leveraged or something you tend to react to? Is quality information meaningfully actionable to leverage in your business?

- How is quality measured and how do investments in quality people, education and systems get decided upon and at what level?

- What are the risks of FDA Warnings, Recalls, manufacturing line stoppages, black/gray market product, and fines? What are the risks to your brand of a Class III Device class action legal filing or highly publicized death or disfigurement?

- Are quality KPI’s included at senior level staff meetings and executive retreats?

- Do the trends of 3rd party contract manufacturing, outsourcing, M&A activity and increased globalization make leveraging quality more or less difficult?

- Is quality included in senior management’s G’ and O’s. I have read many annual reports and CEO’s letters to shareholders that stress quality and safety, but how well has it trickled down into operations?

I could go on and on, but this should prime your thinking on this topic.  Now that we know we have four more years under the leadership of Barack Obama, and understanding that the Medical Device Excise Tax is a key component of financing what has been termed “Obama-care”, the time is now to reprioritize Quality.

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