From absurdity to reality: Medical device tax jolts Invacare CEO Malachi Mixon

By Mary Vanac

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ELYRIA, Ohio — A. Malachi Mixon III shook his head when he first heard about a proposed $4 billion tax on medical device makers as part of the Senate Finance Committee’s healthcare reform bill last year.

“To be honest with you, when I first heard about this, I thought it was so absurd, it will never make it” into final reform legislation, said Mixon, chairman and CEO of Invacare Corp. (NYSE:IVC), which makes home healthcare products ranging from rehabilitative wheelchairs to oxygen systems.

But on Dec. 28, a modified version of the proposal did make it into the Senate’s healthcare reform bill. “All of a sudden, this thing passed. I couldn’t believe it. I can’t believe this is happening to our country,” he said.

Some device makers may be taking a wait-and-see approach when it comes to publicly disussing the proposed tax — it might not happen, they reason — but Mixon and Invacare are less reticent.

“We told our shareholders about the risks. I’m openly talking about it,” Mixon said.

Last week, Invacare said it expects to pay between $12 million and $14 million a year on U.S. sales of medical devices. To start saving money this year to pay that nut, Invacare has “already taken steps to suspend matching contributions under its 401(k) retirement plan, suspend merit pay increases for management employees and freeze new hiring,” according to a regulatory filing.

Mixon talked to MedCity News about the proposed tax and what it would mean for Invacare and the industry.

MedCity News: How do you describe the legislation in both the House and Senate that would tax U.S. sales of medical devices?

Invacare Corp. CEO Malachi Mixon

Malachi Mixon: The unfortunate thing about the tax is it is based on your sales, not on your profits. That means small companies with thin profit margins — or worse, losses — would pay proportionately more than large companies with decent margins.

For instance, Invacare lost money on its U.S. sales in 2008. The Senate tax is not deductible. In order to pay that tax, I would have had to make enough money to pay the federal tax, the state tax, the city tax, and then this new device tax.

MedCity News: What products made by Invacare are “medical devices?”

MM: All of our products are medical devices. Class 2 and Class 3 medical devices would be taxed under the proposed law. Invacare makes Class 1 (not taxed) and Class 2 devices. We don’t make any Class 3 devices like stents or heart valves.

MedCity News: The Senate’s version of the tax started at $4 billion a year. Now, it’s $2 billion a year. What happened?

MM: What we understand happened is very large companies through their association, AdvaMed, negotiated the tax down from $40 billion over 10 years to $20 billion. I wasn’t consulted. Our industry — home healthcare device makers — wasn’t consulted.

We belong to the Medical Device Manufacturing Assn., a small group of about 225 members. Our members’ profit margins average 3 percent — pretty thin.

MedCity News: In Washington, some are rationalizing the tax by saying companies that benefit from healthcare reform should help pay for reform. Do you agree?

MM: We’re not going to sell any more wheelchairs as a result of healthcare reform. Most of our patients are covered by the federal Medicare or Medicaid programs. The prices for their devices are set by the government. We don’t feel we benefit from reform. So I don’t feel we should pay $12-to-$14 million of tax on top of those we already do.

MedCity News: Invacare has suspended 401(k) account matches and merit pay, to start saving money to pay the tax. It’s also stopped hiring. What else might Invacare need to do to pay this tax?

MM: It’s a jump ball. We’re looking at everything. The last thing we want to do is have layoffs. But we’re looking at a price increases, moving our U.S. operations to lower-cost countries and cutting employee benefits and research and development spending.

MedCity News: Why are you speaking out about the tax, and what are you saying?

MM: I owe it to my shareholders to fight this thing to the end. If Invacare’s stock price suffers, so be it. I’m not doing any saber-rattling.

We’re talking about three things. We’re opposed to the tax, we don’t think it’s fair. Two, if there is to be a tax, it ought to be based on profits or gross margin, not on sales. Three, it ought to be delayed to give companies time to figure out how to pay the tax.

MedCity News: So Invacare was hiring before the tax was proposed? That must mean things were going pretty well.

MM: We’ve had our challenges. But we’ve grown from obscurity to the largest manufacturing company in Lorain County. We’re doing pretty well. Then this thing comes out of the blue.

This is not the way to pay for healthcare coverage for more people. Home healthcare device makers are the solution to the high cost of healthcare. We’re inventing devices that allow people to live longer lives, to live more cost-effectively at home. And to hurt us doesn’t make any sense.

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