Johnson and Johnson Makes Overpriced Medical Devices

There has been some mention in the news recently of a “medical device tax.”  This tax is said to be unpopular despite its inclusion in the Affordable Care Act (Obamacare.)  Nonetheless, it has survived a government shutdown and near-default.

In fact, while the Act was being discussed in Congress, the medical device companies favored it, or at least didn’t make any objections.  After it was enacted, however, the companies began to lobby against it.   Since enactment, there has been massive lobbying against all aspects of the ACA.  This lobbying occurred only after the Act had been passed and vetted by the Supreme Court.  Conservative groups have been working overtime in an attempt to get the Act stopped or at least hobbled.  It is odd that these groups didn’t complain before.  It seems that they have been spending money primarily in an effort to make the President look bad, rather than to actually affect legislation.

The New York Times has an op-ed today about medical device manufacturers and how they control the government which is supposed to be regulating them.  Two examples will show how the companies have distorted the market with “anticompetitive” practices.  These apply to implanted devices such as artificial hips and knees.  First, the companies force the hospitals that buy their devices to keep their prices secret, so that no-one can make cost comparisons.  Second, they have prevented the establishment of a device registry that would show relative failure rates for the different brands and types of devices.  The companies themselves have data on failure rates, but they keep this information secret.

As a result, Johnson and Johnson’s medical device division had an operating profit of $7.2 billion in 2012.   The device tax would cost them at most $300 million.  For comparison, they spent only $1.7 billion on research and development.  It seems only logical that they should plow much more of their profits into R+D if they wish to remain competitive.  However, they really don’t have to compete because of the way they have distorted the market; instead, they cooperate with the other device companies to divide up the market and share the riches.

Many observers complain that there isn’t enough competition in the medical business.  Medicine does not lend itself to competition, and introducing it might have unexpectedly negative effects on quality of medical care.  Instead, intensive regulation to control costs and allow doctors and hospitals to make well-informed comparisons between devices and drugs would be the most beneficial change.  The problem of competition– a race to the bottom– was not addressed in the NYT op-ed and is not well recognized by most “experts.”

The NYT op-ed can be found at: http://www.nytimes.com/2013/10/17/opinion/the-myth-of-the-medical-device-tax.html?src=un&feedurl=http%3A%2F%2Fjson8.nytimes.com%2Fpages%2Fopinion%2Findex.jsonp