Medical Apps Regulation, Excise Tax, Raise Concerns in House

"The overbroad application of FDA regulation and the Obamacare medical device tax are not, as some have suggested, outside the realm of possibility,” said subcommittee Chairman Greg Walden, R-Ore. “The app economy is characterized by low barriers to entry, quick time to market, and the ability to adapt to quickly changing user needs,” he said. “Medical devices, on the other hand, face a long and costly pre-market approval process at the FDA. We all want to ensure patient safety, but why would we treat mobile applications the same as a dialysis machine?”

In Oregon a medical device manufacturer has already laid off several hundred employees partly as a result of the new excise tax, Walden said. “I'm hearing about it around the country,” he said. Walden said he worried that U.S. policy could push “innovation” offshore.

Questions remain as well about the effect of potential FDA regulation, as proposed in July 2011 draft guidance on mobile medical applications. The agency has collected comments and industry officials warned last year regulation appears likely (CD June 21 p10). Walden noted that fewer than 80 medical apps have been examined by the FDA to date, while 1,200 appear to be subject to review and “in a state of regulatory uncertainty."

Rep. Henry Waxman, D-Calif., ranking member of the Commerce Committee, said underregulation can be as big of problem as overregulation. “There is a federal interest in ensuring patient safety,” Waxman said. He suggested Republicans are interested in only two issues based on the pre-hearing majority memo (http://1.usa.gov/Y0yeFW): “Whether the FDA will inhibit innovation and whether all of our smartphones will be subject to a device excise tax.”

Waxman cited a recent study by a group of dermatologists that examined four apps that claimed to be able to diagnose melanomas. Three of the four apps incorrectly identified 30 percent of malignant melanomas as benign, he said. “We can’t tell the American people ‘buyer beware’ when potentially life and death decisions are at stake.” Waxman said it’s an “absolute myth” that cellphones or tablets, or even most medical apps, would face the Obamacare tax.

"I think we're kind of walking through a period of what-ifs,” said Rep. Marsha Blackburn, R-Tenn. “If the FDA says we're going to go after the device, all of our mobile devices, as well as go after some of these 80,000 apps, what is that going to do? We're talking about a gross receipts tax. Not a tax on your profits."

Forcht Dagi, a physician and venture capitalist at HLM Venture Partners, warned members that the excise tax would have a direct effect on whether money flows to medical apps while they're in development. “The problem is that there’s a risk to developing any kind of a medical application or a medical device,” Dagi said. “For investors to come in and to provide the investment capital they have to see a reward.” In the early stages of development, the reward is based on gross revenues, the target of the excise tax, he said. “If you cut the gross revenues, first of all you cut the valuations of the company -- they become less valuable,” he said. Money “will find an easier path."

New taxes on wireless medical apps and devices will have “an impact” and policymakers need “to be very vigilant and cautious,” said Jonathan Spalter, chairman of Mobile Future. “Wireless consumers, all of us, are actually paying roughly 17 percent of our monthly bill for our wireless services to taxes,” he said. “Wireless services are taxed at two and half times other goods and service on average across the country."

Witnesses said the threat of additional regulation also will slow investment in medical apps. “We're very concerned about the fact that we haven’t gotten any clear guidance” from the FDA, said Robert Jarrin, senior director at Qualcomm. “The draft guidance document needs to be finalized. We were hoping that through that finalized document we would have a better understanding of whether or not these apps ... should be regulated or the agency will use their enforcement discretion to not regulate them."

Questions about the FDA regulations and taxes are slowing work on medical apps, said Ben Chodor, CEO of Happtique, a mobile health solutions company. “We're hearing from developers and hospitals and docs that a lot of them are waiting on the sideline ... until they start developing in this space,” he said. “They're not going forward."

CTIA President Steve Largent sounded a warning in a letter to the subcommittee about the FDA actions and the excise tax. “Several actions by the FDA and Congress could have a significantly negative impact on the success of mHealth applications and the use of mobile technology to improve health care delivery,” he said. “If the FDA classifies mHealth applications, as well as the smartphones and tablets on which they operate, as medical devices, the FDA could subject such applications and devices to a time-consuming approval process, which would provide an enormous disincentive to innovation in this sector and compromise the availability of life-saving technologies. And the excise tax on medical devices (a category in which the FDA may seek to include mHealth applications and mobile devices) enacted as part of the Affordable Care Act threatens to raise the cost of wireless health products and services, and to discourage research and innovation intended to enable more effective, lower cost treatments. It should be repealed.”