Medical device tax: Zoll CEO Packer says levy will lead to permanent job losses and higher healthcare costs


Rick Packer may have orchestrated a dazzling $2.3 billion acquisition of Zoll Medical (NSDQ:ZOLL) by Japan’s Asahi Kasei Corp. (TYO:3407) this spring, but he still sees the medical device tax as a major stumbling block for both his company and the med-tech industry in general.

The Zoll CEO told a forum in Boston this week that he still finds the tax infinitely frustrating, even 2 years after it first started making headlines as part of President Barack Obama’s healthcare reform law.

"It’s hard for everybody in the device industry, because all of the new patients that many people are promising us don’t kick in for a few years down the road. But the tax starts in 2013," Packer said. "For most of my business, which is a capital equipment business, nobody needs a 2nd defibrillator. There aren’t going to be more heart attacks because of having universal healthcare, so there is no upside to my business from universal healthcare. There is only this tax, and it’s absolutely going to mean fewer jobs, full stop. There’s no question about that."

Zoll, which became a wholly owned subsidiary of the Asahi Kasei Group after the deal closed last month, will continue to be led by current management and with all current business units and operations intact, according to an SEC filing. Nevertheless, Packer said the device tax will force the company to tighten its belt.

"We will move production offshore, which will mean fewer jobs at Zoll. We will do that because we can lower our cost basis and that lower cost basis will lower the tax. It will mean fewer engineers at Zoll, because we will not be likely able to afford them. It will mean a general hiring freeze over the next 18 months or so while we deal with this tax," he said. "In the long run, what every company will do is pass the cost along to our customers. The basic profitability of the industry will raise to its normal level, based on competitive issues, not tax levels. We know that that’s going to happen

"In the long run, you’re going to have the worst case," Packer said. "You’re going to have permanent job loss and higher cost to the healthcare system. It is clearly not my favorite piece of legislation. I do think we have a chance to get it altered, moderated or repealed. We will not execute anything at Zoll until after the fall election. We’ll see what the real lay of the land is then. After that, we will move very quickly to reduce our costs."

Packer has long been a vocal and visible opponent of the tax.

In 2010, Zoll made national news when now-Sen. Scott Brown (R-Mass.) made opposition to the tax a mainstay of his campaign to take the late Sen. Ted Kennedy’s seat during a visit to Zoll’s Chelmsford, Mass., headquarters. Brown picked up many of his talking points against the tax during that visit.

It was then, Brown told in a recent interview, that Packer told him that a 2.3% excise tax on revenues would wipe out the company’s annual profits, a data point that Brown continues to use as he sells his move to repeal to the tax.

"I remember learning about it when I was running," Brown told us. "I went to Zoll Medical and they were talking about how the device tax could potentially represent their entire net profit."

His first thoughts were,"Wow. Now that puts it in real terms," Brown said.

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