Health Care Reform Is Just Beginning for VCs

As Congress pushes toward the end of another bruising session, the year-opening battle over health care reform may seem like a distant memory. However, the real work—implementing the new law’s various reforms—has scarcely begun.

For this reason, venture capitalists should keep the new legislation’s provisions and their potential impacts on innovation—both positive and negative—fresh in their minds.

The good news is that there’s a lot to like in the new law. A number of provisions will likely help spur innovation, particularly in the biotechnology space, and encourage future economic and job growth (see sidebar).

The National Venture Capital Association applauds the senators and representatives who championed these provisions and looks forward to assisting them in spurring and protecting innovation in future legislation.

Unfortunately, the law also contains some provisions that the NVCA believes could potentially stifle innovation and drive investment away from young startup companies—one of the major sources of job creation in our economy. What follows is a rundown of these elements and some recommendations from the NVCA for addressing them.

Taxing Innovation Never Pays

The new law imposes two new taxes that we believe will hamper innovation and stunt job growth: an excise tax on medical devices and a Medicare tax on capital gains.

Under the first, nearly all medical device companies will have to pay 2.3% tax on their products at the point of sale—regardless of the company’s revenue. In other words, this tax will be levied on small startups that haven’t reached profitability yet. The burden of an additional tax on startups could likely lead to those early stage companies having less money for R&D, hiring employees and moving innovative products from development to market. The result: fewer life-saving and cost-saving technologies and the loss of hundreds of thousands of potential jobs.

Meanwhile, the 3.8% Medicare tax on capital gains will blunt one of the federal government’s most historically effective tools for encouraging innovation and investment. For decades, Congress has understood the delicate dynamic between venture risk and reward and the value of that reward. It’s the main reason venture returns received capital gains status for so long. By diminishing the difference between capital gains and ordinary income tax rates, Congress lowers the impact of the former and essentially recalibrates the risk profile of every single venture investment opportunity in the economy—whether in the health care sector or in information technology. The result will be less innovation, investment and job creation across the entire economy.

The NVCA will continue to look for opportunities in which small companies can find relief from these onerous provisions.

Cost Reduction, But at What Cost?

From the very beginning, lawmakers identified cost reduction as a primary goal of health care reform. Toward this end, Congress created an Independent Payment Advisory Board (IPAB) to develop proposals that reduce excess cost growth within Medicare and improve the quality of care for its beneficiaries. While cost reduction is a crucial goal of reform, the IPAB could stifle innovation if it fails to consider the value of technological breakthroughs over the long term.

There’s a lot to like in the new law. A number of provisions will likely help spur innovation, particularly in the biotechnology space, and encourage future economic and job growth.”

Let’s face it: Most often the introduction of disruptive innovation is expensive. It begins with significant cost upfront, but delivers increasing value and better quality of care for patients and often cost savings over the longer term. It also takes time for medical professionals to successfully integrate new technologies into their treatment strategies.

Coronary angioplasty is an instructive example. In its first decades, angioplasty was difficult to use, delivered only pain relief and had no impact on mortality. It would not have passed a simple comparative- or cost-effectiveness test. However, steady advances and significant investment by the venture capital industry eventually led to the development of stents and drug-coated stents in the1990s and early 2000s. The improvement of the technology, coupled with other advances in medical treatment, produced tremendous reductions in mortality from heart attacks and improvements in patient’s life expectancy, as compared to 20 years ago.

For this reason, the IPAB must adopt new-technology review standards that clearly recognize the complex life cycle of medical innovation. It should also be required to value plausible future improvements of new technology and their impact on future health outcomes when assessing the current value of medical innovations. For this purpose, the IPAB should include persons with demonstrated expertise in medical innovation and its life cycle.

Research Should Generate Evidence, Not ‘Winners’

For a number of reform provisions, the difference between good and harm will depend heavily upon how they are implemented. The law’s increased emphasis on comparative effectiveness research (CER) provides a prime example.

The NVCA supports the idea behind the new CER system because of its potential to expand the evidence base of medical practice. This is significant because many of the most costly medical practices in our system do not draw on such a base to support their widespread use. Others, while effective, may also drive costs up through overuse or underuse. Thus, an expanded evidence base can improve quality of care and reduce costs generated by unnecessary and ineffective care.

CER will achieve these benefits only if it focuses on high-cost, high-variation treatments, which indicate uncertainty among practitioners regarding optimal medical practice. These are areas where better information could actually produce large economic and quality impacts.

Conversely, narrower comparisons of individual technologies or drugs—geared toward picking “winners” or based on cost-effectiveness—would likely yield less impact on quality outcomes and costs. In addition, an emphasis on cost-effectiveness would place cost above clinical effectiveness in evaluating medical practices—a clear negative.

Finally, CER must take into account the life cycle of technological innovation and recognize that its value can only be measured over the long term. Similarly, the CER process should not create an undue burden on such technologies by replicating the comparative effectiveness work that its creators have already done as part of its development, or by creating an additional standard for approval, payment and coverage determinations.

One sure way to address both of these issues is to include people with significant experience in entrepreneurial medical innovation on the advisory boards that will oversee the new CER system.

Improve Patient Outcomes First

At first glance, the establishment of a Center for Medicare and Medicaid Innovation (CMI) would seem like a clear winner for venture-backed innovators and entrepreneurs. Unfortunately, it’s not entirely a no-brainer for venture capital. The center will focus on testing innovative payment and service delivery models to reduce program expenditures—not on treatments—but there is still reason for enthusiasm.

Unfortunately, the law also contains some provisions that the NVCA believes could potentially stifle innovation and drive investment away from young startup companies.”

The NVCA supports testing new delivery systems that promote coordinated care and integrated new technologies, especially if they can reduce overall system costs. But that’s only half of the equation. CMI should also create an environment that fosters the development and implementation of valuable medical products and services. These can also lower costs and improve efficiency over the long term.

In addition, the Centers for Medicare & Medicaid Services should explicitly consider the impact on new technologies when evaluating new payment systems. The last thing we want to do is trade innovation in patient care for payment and delivery efficiencies when both can be achieved with the right approach.

The new pilot program for bundling payment for patients and accountable care organizations based on an entire episode of care provides cause for the same guarded optimism. This program and similar reforms have the potential to improve the coordination, quality and efficiency of care for beneficiaries. However, what’s missing in the legislation is detail about how these programs will be designed and on which conditions they will focus.

Without such details, it is difficult to anticipate what their impacts—intended or otherwise¬—might be on the adoption of new treatment technologies for patients. For this reason, the NVCA will pay close attention to the development of these reforms. Our focus will be on ensuring that these programs avoid limiting provider incentives for adopting new technologies. Toward this end, we would gladly lend our assistance in developing a proposal that would provide the ability to incorporate payments for new technology in the pilot program.

Overall, the Patient Protection and Affordable Care Act and The Health Care and Education Affordability Reconciliation Act move our country forward by reforming the nation’s insurance system and providing coverage for all Americans. In many instances, however, the devil remains in the details. For this reason, we look forward to working with the Obama Administration and members of Congress to hash out these details and to implement the new law’s reforms in ways that will improve the quality of care and safeguard innovation.

Kelly Slone is the director of the Medical Industry Group for the NVCA. She may be reached at

Some Health Care Reform Pluses

Several provisions in the health care reform legislation will likely help spur innovation and encourage future economic and job growth:

• The FDA pathway and data exclusivity for biosimilars, which extends the current 12-year exclusivity period for reference products.

• The Cures Acceleration Network (CAN) which authorizes $500 million in additional funding for early stage research to accelerate high need cures. These dollars will still need to be appropriated by Congress.

• The Therapeutic Discovery Project Tax Credit for tax years 2009 and 2010. An entity eligible for the tax credit must employ 250 or fewer employees in all businesses.

• The Molecular Diagnostic Payment Demonstration Project, which is a $100 million project for separate payment of complex diagnostic laboratory tests. —Kelly Slone, NVCA