In the wee hours of the morning on May 19, 2002, officials from the U.S. Food and Drug Administration and a handful of representatives from the Advanced Medical Technology Association hammered out a deal that some say could change forever the face of innovation in the medical devices industry.

The document they created, entitled the Medical Technology Enhancement Act of 2002, would attach fees to approval applications for new medical devices, essentially requiring manufacturers to pay for faster FDA reviews.

Hailing the agreement as a major victory for product innovation, Jeff Ezell, director of media relations at Washington-based AdvaMed, says the agreement could attract venture capitalists to the industry like never before.

“When investors are confident that they have a predictable path to market, they're more apt to invest in medical technologies,” he explains. “[These fees] will help ensure that the latest technology is in the hands of patients and doctors.”

This is good news for home medical equipment providers, Ezell continues, because the influx of new products will stimulate business and will stiffen manufacturers' competition for providers' dollars.

But some small-business representatives say it is not time to start celebrating yet.

Forcing the Small Fish Out of the Pond?

The new fee structure could be cause for alarm, according to Mark Leahey, director of federal affairs at the Medical Device Manufacturers Association in Washington, whose members include many small manufacturers. “These fees are going to force the small guy — the guy who's really innovating — out of the field,” he says.

The FDA clearly did not study the data on who submits applications for much of the breakthrough medical-device technology in the United States, Leahey says, because the data clearly shows that small manufacturers are the key to innovation. “Big companies buy small companies for innovation,” he explains.

And while the fees may not hinder small companies with venture capital backing, the fees most certainly will discourage many startup inventors. “A company that is venture-backed is different than a doctor and an engineer getting together,” Leahey says. “A fee of $125,000 [like the one proposed for breakthrough technologies] would force the doctor and the engineer to take out a second mortgage on their houses.”

For HME providers, this could create a dull product landscape in coming years, Leahey continues. “Five or 10 years down the road, if there is such a high barrier to entry, you're forcing the small fish out of the pond. Innovation will be stagnant.”

To 510(k) or PMA?

But perhaps forcing some of the small fish out of the pond is one of the FDA's goals, says Ron Richard, vice president of marketing for Poway, Calif.-based ResMed. Breakthrough products that need “pre-market approval” applications, or PMAs, require a lot of work on both the applicant's and the FDA's part, he explains. Because they are unlike any preceding device, PMA products require extensive clinical data to support their effectiveness.

For this reason, perhaps the FDA wants to charge a fee that ensures applicants are serious, Richard suggests. “Maybe the FDA is trying to ask the questions, ‘Why are you wanting to go after a PMA?’ and ‘Is there instead a predicate device out there that does the same thing?’”

In most cases, PMAs are risky and not necessary, he continues. “PMAs are really something that — at least in the respiratory field — most people avoid, because of the amount of time and money required, and the fact that the potential for [receiving approval] is low.”

Ninety percent of the time, manufacturers file 510(k) applications, which require little original research on the FDA's part, Richard says. These applications seek approval for minor modifications to an existing product or for a new product that is similar to other products already on the market.

Under MTEA's fee schedule, 510(k) applications would cost only $2,500, a fee that the FDA contends is negligible.

“We tried to create a fee structure that, for 510(k) products especially, had a really low fee,” an FDA spokesman told HomeCare. “We didn't think that fee would create any kind of barrier to innovation.”

But Bob Mogue, executive vice president of sales and marketing for Lenexa, Kan.-based CareFore Medical, wonders why any fee for 510(k) applications is necessary. As part of a small manufacturing and distributing company, Mogue has been pleased with the FDA's 510(k)-approval record.

“In the past five or six years, the FDA has done a pretty decent job of speeding up 510(k)s,” he says. “All in all, I think the current [510(k)] system is working pretty well.”

Bait and Switch?

As the FDA tells the story, the manufacturers came to the government asking for a fee agreement. “Successes under [the Prescription Drug User Fee Act, which 10 years ago established similar fees for pharmaceutical manufacturers] fueled an interest in pursuing this for medical devices,” says an FDA spokesman.

“I think for people going in, there was a belief that something had to be done to get the FDA the resources it needed,” AdvaMed's Ezell agrees. “Review time has to be improved. For PMAs, the statutory deadline set by Congress is 180 days, but the actual review time that the [FDA's] device center is meeting is 411 days.”

By allowing the FDA to hire additional review staff and to consult with outside experts when reviewing breakthrough technologies, MTEA would speed up review times significantly, the FDA says. In exchange for $150 million in fees — which manufacturers would pay during the next five years under MTEA — the FDA is promising to reduce review times by 25 to 50 percent.

And faster review times are just the beginning, according to the FDA. “We would anticipate that there would be other enhancements built into the system,” the spokesman said. “For example, there would be additional interaction with manufacturers — more meetings and more guidance. As a result of that interaction, we expect that manufacturers will be able to submit better applications.”

But MDMA's Leahey urges stakeholders to read the small print. He says the FDA's performance goals hinge on congressional appropriations. If Congress does not hold up its end of the bargain by appropriating a total budget of at least $205.7 million for the FDA during each of the agreement's five years, then the FDA does not have to meet its end of the bargain.

“The current proposal guarantees user fees without guaranteeing performance goals,” Leahey says. “A first-year law student can tell you that's a bad idea.”

A Safety Net for the Small Fish?

Quick to point out that 11 of AdvaMed's 13 executive committee members are officers at billion-dollar companies, MDMA's Leahey says the negotiators who stayed up late on May 19 to craft a fee agreement did not invite small-business representatives to the table.

“AdvaMed agreed to [MTEA] before they spoke to their [small-business] members about it,” he says. “Now they're working backward trying to explain why it's a good deal.”

But AdvaMed's Ezell insists the original negotiators did include small-business representatives, and that the deal is good for everyone.

“We think it's a strong package as-is,” he says. “There is a provision in the agreement that says small companies with revenue under $5 million can file for a fee deferral until one year after their product is approved. So they have one year to start gaining revenue before they have to pay that fee. If, at the end of the year, the fee is still burdensome, they can file for another deferral or to waive the fee altogether.”

However, while MTEA virtually guarantees a one-year deferral for small businesses, it leaves subsequent deferrals or waivers to the discretion of the Secretary of the Health and Human Services Department. “One year after the date of approval, denial or withdrawal of a pre-market application,” the document says, “a small business that received a fee deferral shall pay the fee required under subsection (a), unless the Secretary grants a waiver of some or all of the fee or an extension of the deferral for a specified time period.”

Despite MTEA's protections, Miriam Lieber, president of Lieber Consulting in Sherman Oaks, Calif., says the fees could create a psychological barrier for small manufacturers. “If I'm a small inventor, what kind of chance can I take if I have little or no backing?” Lieber asks. “These inventors are people who had a bad [health care] experience and who came up with a solution to make it better.”

And breakthrough products from small inventors often are extremely lucrative for HME providers, Lieber notes. “To the [HME] provider, I think this could mean two things,” she says. “It could make the bigger guys bigger or it could preclude providers from finding a windfall from smaller guys.”

Comparing FDA's user fees to the issue of competitive bidding, Lieber concludes, “I would rather see everyone be able to play. Like with competitive bidding, it's really about affordability.”

Debra Harrington, president of Lexington, S.C.-based Harrington Consulting and a former reviewer at the Statistical Analysis Durable Medical Equipment Regional Carrier, agrees that even with the deferral, proposed fees could discourage innovative small companies from entering the market.

“I have a lot of clients that are small companies with new products that need to go through the FDA and the coding process, and most of these companies never could afford that [$125,000] fee,” she says. “Not every product in the medical device industry is an expensive electronic device. Some of these [breakthrough] devices retail for $35. For example, look at the heel boots that came out recently. They don't cost much, but there is not a predicate device. That's a lot of money, and it would take a great deal of time to pay back.”

Necessity, the Mother of … Compromise?

Despite his many objections to the current user-fee agreement, MDMA's Leahey admits that the FDA needs help.

“We have to be pragmatic,” he says. “We realize the economic situation of the government, and we don't want review times to worsen. But at the same time, we do not believe in a one-size-fits-all fee. We advocate a base user fee with a small-company deduction, relative to size.”

Eager to bring everyone on board, the FDA is listening intently to suggestions from MDMA and others about ways to improve the user-fee agreement. “We have been talking to other parts of the medical device industry, as well as to patient consumer groups,” the FDA spokesman said. “I wouldn't [say] that everybody in the medical device industry thinks user fees are a great idea, but I will say that I think there is a substantial amount of support for doing something right now.”

While Leahey says it is a bit late in the game for the FDA to be soliciting other stakeholders' opinions — noting that Congress almost attached MTEA as-is to bioterrorism legislation in the spring — he is hopeful that all interested parties can find a happy medium. “We're working closely with the Hill and the FDA to reach a solution,” he says.

Ultimately, whether manufacturers will have to pay for FDA reviews or not is up to legislators.

“Congress needs to decide whether this is something they want to do this session,” the FDA spokesman explains. “Obviously, you can never predict what is going to happen on the Hill, because new things pop up, but we have been hearing that there is an interest on the part of Congress in doing something this session.”

AdvaMed's Ezell is equally enthusiastic that Congress will take up the user-fee issue, along with an FDA-process reform bill (H.R.3580), this session. “There is broad bipartisan support for both [measures],” he says. “We're very optimistic for this session of Congress.”

But, Leahey warns, “If we cannot reach a [mutually agreeable] solution, we'll fight this thing tooth and nail.”