Medical device tax: Companies (cautiously) optimistic on repeal coverage of medical device tax

Leaders of the medical device industry expressed confidence last week that the votes are there in the U.S. Senate for a full repeal of the medical device tax, slated to go into effect in January 2013.

"At the moment, I’m still betting that the tax will be repealed," B.Braun Medical CEO Caroll Neubauer told audience members at the AdvaMed 2012 conference in Boston. "We have a bill in the U.S. Senate, which if it gets to the floor would pass. It would get 53 or 54 votes from outspoken senators, including Democrats, who are going to vote for it.

"It’s the Senate majority leader [Harry Reid (D-Nev.)] and the chairman of the Senate Finance Committee [Sen. Max Baucus (D-Mont.)] who are not letting it get to the floor," he added.

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Neubauer’s confidence was echoed by other leading voices of the medtech industry in Boston, including AdvaMed CEO Stephen Ubl, who told reporters that the industry has seen "considerable Senate support for the repeal, and it seems to be growing," Ubl said.

While those comments could be construed as the industry putting on a brave face, there is little doubt that the issue continues to gain traction in the press.

A recent editorial in the Wall Street Journal penned by former Sen. Evan Bayh (D-Ind.), calling for a repeal of the tax, was considered by many as a good sign that there is bipartisan support for the repeal.

The former Indiana governor, who’s now doing some lawyering for medical device companies for the Washington, D.C., firm McGuire Woods, urged his former Senate colleagues to repeal the medical device tax.

"The hit will be severe. For a typical company, a 2.3% tax on revenues equals a 15% tax on profits," Bayh wrote. "When combined with a 35% corporate tax and state corporate taxes, the tax rate for the medical-device industry will exceed 50% in most jurisdictions. Many marginally profitable businesses will then hemorrhage red ink, since they’ll have to pay the excise tax whether they are making money or not."

Bayh’s change of heart is notable. During his tenure in the upper chamber, Bayh fought to modify the tax, rather than block it.

In 2009, Bayh co-sponsored amendment to alter the tax to shield small device makers with less than $100 million in revenues and tier the payments based on certain milestones. The Bayh-Kloubuchar amendment, which was supported by AdvaMed, was ultimately not adopted by the Senate.

While device makers will take support where they can get it, there is still concern that the tax will manage to live on. The uncertainty is having an effect on workers’ morale.

"People in our production facilities read the newspaper, they know what’s going on. I’m getting these questions about [layoffs]," Neubauer said. "We have a contingency plan in place, which we’re going to try and stay together as the B.Braun family, which we take pride in, and I hope we’ll be able to do that. But I can’t assure them and I make no assurances whatsoever."

Abiomed (NSDQ:ABMD) CEO Mike Minogue added that part of his job is to " shield folks from the gloom and doom."

Minogue reinforced the point that the tax is misguided for several reasons.

"We’re confusing healthcare reform, which has a lot of things that the industry supports: More access and quality outcomes; and a tax policy that, if put into place, could hinder that focus."

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