Medtronic 2013 Annual Report Download - page 32

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Table of Contents
The process of obtaining approval to distribute medical products is costly and time-consuming in virtually all of the major markets
where we sell medical devices. We cannot assure that any new medical devices we develop will be approved in a timely or cost-
effective manner or approved at all.
Federal and state laws protect the confidentiality of certain patient health information, including patient medical records, and
restrict the use and disclosure of patient health information by health care providers. In particular, in April 2003, the U.S. Department
of Health and Human Services (HHS) published patient privacy rules under the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) and, in April 2005, published security rules for protected health information. The HIPAAprivacy and security
rules govern the use, disclosure, and security of protected health information by “Covered Entities,” which are health care providers
that submit electronic claims, health plans, and health care clearinghouses. In 2009, Congress passed the HITECH Act, which
modified certain provisions of the HIPAA privacy and security rules for Covered Entities and their Business Associates (which is
anyone that performs a service on behalf of a Covered Entity involving the use or disclosure of protected health information and
is not a member of the Covered Entity’s workforce). These included directing HHS to publish more specific security standards,
and increasing breach notification requirements, as well as tightening certain aspects of the privacy rules. HHS published the final
versions of these new rules in January 2013, and Covered Entities and Business Associates are expected to be in compliance
by September 2013. In addition, the HITECH Act provided that Business Associates will now be subject to the same security
requirements as Covered Entities, and that with regard to both the security and privacy rule, Business Associates will be subject
to direct enforcement by HHS, including civil and criminal liability, just as Covered Entities are. In the past, HIPAA has generally
affected us indirectly. Medtronic is generally not a Covered Entity, except for a few units such as our Diabetes business and our
health insurance plans. Medtronic only operates as a Business Associate to Covered Entities in a limited number of instances. In thosecases,
the patient data that we receive and analyze may include protected health information. We are committed to maintaining the security
and privacy of patients’ health information and believe that we meet the expectations of the HIPAA rules. Some modifications to
our systems and policies may be necessary, but the framework is already in place. However, the potential for enforcement action
against us is now greater, as HHS can take action directly against Business Associates. Thus, while we believe we are and will be
in substantial compliance with HIPAA standards, there is no guarantee that the government will not disagree. Enforcement actions
can be costly and interrupt regular operations of our business. Nonetheless, these requirements affect a limited subset of our business.
We believe the ongoing costs and impacts of assuring compliance with the HIPAAprivacy and security rules are not material to our business.
We are also impacted by the privacy requirements of countries outside the U.S. Privacy standards in Europe and Asia are becoming
increasingly strict. Enforcement action and financial penalties related to privacy in the EU are growing, and new laws and restrictions
are being passed. The management of cross border transfers of information among and outside of EU member countries is becoming
more complex, which may complicate our clinical research activities, as well as product offerings that involve transmission or use of clinical data.
We will continue our efforts to comply with those requirements and to adapt our business processes to the standards.
Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing,
bidding and tender mechanics, coverage and payment policies, comparative effectiveness of therapies, technology assessments,
and managed-care arrangements, are continuing in many countries where we do business, including the U.S. These changes are
causing the marketplace to put increased emphasis on the delivery of more cost-effective medical devices and therapies. Government
programs, including Medicare and Medicaid, private health care insurance, and managed-care plans have attempted to control
costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement to
outcomes, and other mechanisms designed to constrain utilization and contain costs. Hospitals, which purchase implants, are also
seeking to reduce costs through a variety of mechanisms, including, for example, gainsharing, where a hospital agrees with
physicians to share any realized cost savings resulting from the physicians’ collective change in practice patterns such as
standardization of devices where medically appropriate. This has created an increasing level of price sensitivity among customers
for our products. Some third-party payers must also approve coverage for new or innovative devices or therapies before they will
reimburse health care providers who use the medical devices or therapies. Even though a new medical device may have been
cleared for commercial distribution, we may find limited demand for the device until reimbursement approval has been obtained
from governmental and private third-party payers. In addition, some private third-party payers require that certain procedures or
that the use of certain products be authorized in advance as a condition of reimbursement. As a result of our manufacturing
efficiencies and cost controls, we believe we are well-positioned to respond to changes resulting from the worldwide trend toward
cost-containment; however, uncertainty remains as to the nature of any future legislation, making it difficult for us to predict the
potential impact of cost-containment trends on future operating results.
The delivery of our devices is subject to regulation by HHS and comparable state and non-U.S. agencies responsible for
reimbursement and regulation of health care items and services. U.S. laws and regulations are imposed primarily in connection
with the Medicare and Medicaid programs, as well as the government’s interest in regulating the quality and cost of health care.
Foreign governments also impose regulations in connection with their health care reimbursement programs and the delivery of
health care items and services.
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