Hatch fights to repeal medical device tax

From the moment President Barack Obama March 23, 2010 signed the Patient Protection and Affordable Care Act, Americans have been left to sort out the winners and losers.

One of the winners was supposed to be the medical devices industry, which would reap the windfall of 30 million newly covered customers in the marketplace.

In the effort to create what the president promised would be a “deficit-neutral” bill, those crafting the Affordable Care Act included a 2.3 percent tax on the sales of medical devices and instruments. Thus, the industry became at once a winner and loser with the enactment of the health care reform law.

“We have been working from Day One to have this tax repealed,” said Brendan Benner, the vice-president of public affairs for the Medical Device Manufacturers Association.  “We continue to fight it today, it is not only a bad tax, it is poorly designed because of the excise component to it,” he said. “This is a tax on revenue, not profits,” he said.

Tax revenue, tax profits

“This is a very dynamic industry, and approximately 80 percent of medical device companies have less than 50 employees, these are companies that are literally just ramping up, they might have one, two, maybe three technologies or devices they are trying to get these into the marketplace, so they may have revenue, they are not even close to profitability yet,” he said.

“We have many, many, many companies, who will be paying a tax to the IRS without earning one penny in profits,” he said. “The IRS has not put out its final regulation, but a 2.3 percent excise tax on $1 million in revenue, you would be paying a $23,000 bill just for the excise tax,” he said.

The company in this example would pay that $23,000 on top of any other corporate income tax it would owe on any profits, he explained.

In an economy that has been dragging along, one of the bright spots has been the medical devices industry, said Timothy Tardibono, vice president for public policy and chief counsel of Connect, a company created in 1985 to harness the technology incubating from the University of California at San Diego and today a consortium of research facilities, companies and investors focused on bringing Southern Californian technology to market.

How NuVasive helped Bill Walton

One example of a Connect company is NuVasive (NUVA-Nasdaq), which went public in 2004 and is now the fourth largest supplier of spine devices in the world, said Tardibono, who was also chief counsel to Sen. Thomas Colburn (R-Okla.).

Alexis V. Lukianov, the company’s CEO and chairman, said there is one good reason for his company’s success, “We created a disruptive technology from scratch.”

The company produces implants and replacement disks that a surgeon can fit into the spine in a minimally invasive way, he said. These implants have been so successful that they have changed back surgery from a three- to four-hour ordeal with a long recovery and a fair chance of success to a short outpatient procedure that is highly successful.

Founded in 1997, the company has more than $600 million in revenues and 1,500 employees, he said.

“All of our success has been predicated on our ability to enhance spine surgery,” he said. The company’s products save money, time and offer a higher quality result than the old methods, he said.

“We’ve been able to improve the lives of more than 200,000 patients around the world, including [former basketball player] Bill Walton,” he said.

Walton will tell you that he was on the verge of suicide from severe back pain and the medication for the pain, Lukianov said. His back forced him to end his broadcasting career.

“Three years ago, he had the procedure done, he is back doing everything he wants to do,” he said. The seven-footer recently announced his return to broadcasting will be back on TV with NBC Sports.

“What has really made NuVasive successful is speed,” he said. “Speed is critical: speed of responsiveness to customers, speed of innovation, speed of releasing new products on an on-going basis—whenever that is curtailed it has a deleterious effect.”

NuVasive and other medical technology companies are slowing down under the weight of regulation and taxation, he said.

The medical device tax alone will cost NuVasive $14 million in 2013, he said. This will burden means that the company hired only 200 of the 400 new employees it planned to hire in 2012, and that the company has a hiring freeze.

Lukianov said, because the tax hits its U.S. business, the company has a new goal of increasing its overseas revenue from eight percent to 20 percent.

Justification for the tax falls short

Matthew Dolan, a senior research analyst at Roth Capital Partners, said he discounts the argument made by supporters of the medical device tax that it is a payback for the windfall the companies would reap when 30 million new customers gain access to health care plans through the Affordable Care Act.

Dolan said similar claims were made when Massachusetts adopted its own universal health care plan, but in fact sales of medical devices in the Bay State grew more slowly than rest of the country.

While the medical device tax is effective Jan. 1, the influx of new patients will not arrive until 2014, he said.

“In a recent survey, over 70 percent of companies said the tax would have a somewhat to negative effect on their business,” he said.

Dolan said the 2.3 percent of sales does not strike people as a high tax rate, but this is because they do not consider the tax as a percentage of profits.

“In particular, the smallest companies will be taking the biggest hit, by far,” he said. The tax will force companies to cut their workforce and their research and development budgets, he said. “These financial concerns will impact jobs and innovation.”

Cook Medical looks overseas

Another company working to repeal the medical device tax is Cook Medical, said Allison Giles, vice-president for federal affairs specialist for the family-owned business based in Bloomington, Ind.

“Cook will no longer be able to expand our manufacturing in the United States,” she said.

“We’ve always been in the United States, we’ve always resisted going abroad, so we will be one of the last in the industry to hold on as long as we can,” she said.

“At some point, and I don’t know when that is, decisions will have to be made,” she said.

“As new products get developed and go to market, we will be looking overseas to manufacture those products,” Giles said. Cook has 10,000 employees worldwide and sells more than 16,000 individual products, such as stents, balloons and other devices for 41 specialties, including heart surgery and assisted reproduction.

“Then, as we move manufacturing overseas, you could see a ripple effect,” she said.

Manufacturing is an iterative process, so as products are improved and approved, engineers and researchers need to engage in the manufacturing as well, she said.

In the beginning of the fight against the medical devices tax, supporters of the president’s health care law were reluctant to see any aspect of it changed, she said. “They wanted to keep everything intact because this was a revenue raiser, but once we show what is happening in the industry, all the companies announcing layoffs, and what it means for patients, members on both sides of the aisle are expressing concern.”

Cook is encouraged that members of congress are moving past the health care debate and focusing on the impact on jobs, she said. “Democratic senators are quietly saying to us that they support it and seeing if there is something they can do to be helpful in stopping this from going into effect in January.”

Democrats also support repeal

Benner said when the House voted 270 to 146 June 7 to repeal the tax with 37 Democrats joining Republicans.

“I think the best news for people fighting the medical device tax is that the House vote was overwhelmingly bipartisan,” he said.

“This is clearly a non-partisan issue, it’s about innovation, it’s about manufacturing, it’s about high-tech jobs—the very jobs that every candidate is discussing about how to bring into their own districts, their own states,” he said.

Legislation pending

It is now up to the Senate to pass a companion bill, which would most likely be the bill, S. 17, offered by Sen. Orrin G. Hatch (R-Utah). The House bill, H.R. 436, was sponsored by Rep. Erik Paulsen (R-Minn.).

Hatch is the ranking GOP senator of the Senate’s Finance Committee and since the Obama signed the Affordable Care Act, he has said, “I will tear out this law by branch and root.”

In addition to his stand-alone bill, in the past year, Hatch has attached his medical device tax repeal to funding for the Food and Drug Administration and tried to attach it to a bill to fund new jobs programs for veterans. He agreed to withdraw his amendment from the FDA bill and the jobs bill was killed by a filibuster.

“Hitting medical device manufacturers – an innovative engine of our economy – with a job-killing $28.5 billion tax hike is exactly the wrong thing under a weak economy,” the Utah senator said.

“This is a tax on innovation and job creation that will ultimately stifle the development of life-saving medical devices with costs that will be passed on to consumers. It’s time for this White House to get behind real pro-growth policies to get our economy moving again,” he said.

Brenner said, “We are the global leader in medical devices, far and away, but there is a chance that if this tax goes through, we are going to lose our leadership position and never get it back,” he said.

“Some of these companies are unfortunately announcing layoffs,” he said. “Some are very vocal and very publically attributing the layoffs to the actual impact of the device tax, which hasn’t yet taken place, but because of the forward planning, these companies is see a big tax coming their way and they need to adjust,” he said.

Welch-Allyn to lay off 10 percent

One example is Skaneateles Falls, N.Y.-based Welch-Allyn, he said. “They essentially announced that they were laying off 10 percent of their workforce.”

In its Sept. 10 statement, the family-owned maker of diagnostic equipment said the layoffs were part of a global restructuring program brought on by the new healthcare law and the medical device tax. The company, founded in 1915, has 2,750 workers worldwide.

“These actions will proactively prepare the company to address the new onerous U.S. Medical Device Tax scheduled to begin in 2013 as mandated in the Affordable Care Act, as well as other significant changes driven by healthcare reform and market dynamics,” the statement said.

“The company will also perform a 90-day evaluation of its European operations to determine the optimal deployment of the business in that important market, and reorganize its Latin America business to be more competitive in the region,” it said.

Broad industry concern

Brian Johnson, the co-founder and publisher of MassDevice.com, a Boston-based news site devoted to the national medical devices industry, said its outlook for the industry is getting worse. “There is true concern among the players here.”

A Sept. 14 MassDevice story said, “Medical device companies are molting at a reptilian rate, shedding more than 2,000 jobs over the past two months as they look to slash costs across the board.”

Johnson said the medical device tax is not the only reason source of the industry’s trouble; other factors include a bad economy and hostile regulatory environment. “It is in the mix of what they call a challenging health care environment.”

The medical device tax will not hurt many start-ups, because they are pre-revenue, while the companies who are really hurt will be the ones with below $100 million in revenue, which is the point where companies start to see profits, he said. “It will be particularly uncomfortable for companies who are hovering around that line.”

New medical device companies are also hurt by the lack of funding from traditional sources of investment capital, which are shying away from the industry, he said.

A number of the large companies are blaming the tax for their layoffs, he said. “What you are seeing across the industry are companies looking to cut expenses across-the-board using the tax as one of their reasons.”

How the tax came about

Johnson, a former reporter for the Associated Press and the Lawrence (Mass.) Eagle-Tribune, said it has been rumored that the industry was punished for not cooperating with the crafting and passage of the Patient Protection and Affordable Care Act.

“Most of that was back-chatter,” he said. “Nobody goes on the record.”

The medical devices industry was involved in the early stages of the health care reform and representatives from the industry participated in stakeholder meetings, he said.

The tax itself came out of the office of Sen. Max S. Baucus (D-Mont.), the chairman of the chamber’s finance committee, when they were drafting the “pay-fors” for the Affordable Care Act, he said. The tax is expected to bring in $30 billion in revenues. “It was all kind of sausage making how the finance committee came up with the bill.”

Elizabeth Warren supports repeal

Former Obama official and current Massachusetts Democratic senate candidate Elizabeth Warren wrote an April 17 piece for MassDevice.com declaring her support for the repeal of the tax, he said.

Warren is running against Sen. Scott P. Brown (R-Mass.), who is a co-sponsor of the Hatch repeal bill.

“When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential,” Warren wrote.

“It also pushes companies of all sizes to cut back on research and development for life-saving products. With an appropriate offset, we can repeal the medical device tax without cutting health care coverage for millions of people or forcing Americans to fight the whole health care battle all over again.”

Johnson said Warren’s call for the tax repeal got a lot of attention in the industry.

“They thought it was a big moment for the industry,” he said. “There you have someone who was considered a liberal stalwart, someone who is certainly someone who is not anti-tax, saying that this is an unfair burden,” he said. “Brown has been as vocal and visible as it gets for the industry, but it was a smart political calculus for her to take the issue out of his hands.”

New website devoted to tax talk

Joe Hage, a marketing consultant based in Manhattan, said nine months ago, he took over the Medical Devices Group, an online community on Linkedin.com. The group is the largest of its kind with more than 135,000 members worldwide. “Very quickly, the tax became the most talked about issue on the board.”

Hage said he created the web site no2point3.com in response to the uproar he felt in among members of his group.

On the site, there are 400 signatures from leaders of medical device companies, and nearly 9,000 signatures on a petition calling for MDT repeal, he said. The signatures can be sorted by company and by state. “I was trying to channel the energy of the group and give them something to do other than grouse.”