UPDATE: Device makers react to healthcare reform bill’s excise tax

Healthcare reform

The U.S. House of Representatives narrowly passed landmark healthcare reform legislation that would impose a 2.3 percent excise tax on sales of most medical devices.

No House Republicans voted for the Senate’s healthcare bill and 34 House Democrats voted against it, but the measure still squeaked through on a 219-212 vote. A last-minute pledge from President Barack Obama to issue an executive order banning the use of any funds from the $940 billion bill to pay for abortions won over some last-minute holdouts. The bill’s passage also depended on a companion bill, which passed on a 220-211 vote, that made changes to the Senate bill to make it more palatable to House members. The two bills are slated to be voted on within days in the Senate; if approved, Obama could sign them into law by week’s end.

The medical device excise tax would apply to products ranging from surgical instruments to bedpans starting in 2013, according to news reports. The provision is expected to raise $20 billion over 10 years to help pay for healthcare reform.

Reaction from the industry was mixed, at best. Tom Sommer, president of the Massachusetts Medical Device Industry Council, blasted the tax, saying it would stifle growth and put innovation in peril.

"You’re certainly going to see an impact on growth and expansion by medical device companies in this country that are going to be faced by a higher tax bill. In addition to job cuts and rollbacks on expansion plans, you’re going to see a reduction in R&D spending. Innovation in this industry is definitely in jeapardy, which is shameful," Sommer told MassDevice. "Obviously we’re disappointed in the final outcome. The device tax does not take effect until 2013 and we’re hopeful that between now and the implementation date we’ll be able to scale back, and certainly we’ll be supportive of any effort to remove that tax from the law."

Wanda Moebius, vice president of policy communications for the Advanced Medical Technology Assn. (AdvaMed), told us that the tax is at least an improvement over prior proposals.

"We have come a long way since the medical device tax was initially proposed at $40 billion and slated to begin in 2010," Moebius said. "While no tax is ideal, as passed in the House reconciliation legislation the device tax is now estimated at $20 billion, begins in 2013, is deductible from corporate taxes and is structured as a predictable excise tax."

Dr. James Muller, founder and CEO of InfraReDx, told us last week that the tax would hit his firm’s ability to attract investors. InfraReDx is developing a near-infrared spectroscopy catheter to detect the intracoronary composition of lipid core plaque.

“The [tax] hurts us in a different way, because investors say to us, ‘You have all these obstacles and if you’re successful they’re going to tax you.’ It’s wrong and not in the best interest of the U.S. We hear about China and India overtaking us, but we’re swimming upstream here,” Muller said.

While there’s been a lot of fretting about how the new excise tax will affect industry, the reality is that many medical device officials just aren’t sure how the tax will be metered out or what their individual companies’ burdens will be.

As a result, many firms are in a holding pattern, waiting to see what their healthcare economics people will say.

Mike Frazzette, president of Smith & Nephew Endoscopy in Andover, Mass., told MassDevice that the company was one of the firms hanging fire. The company had a meeting planned with officials from AdvaMed in January to discuss the device tax, but after Sen. Scott Brown’s (R-MA) election that month, the meeting was postponed as everyone waited to see what effect it would have on the pending legislation.

So when the news came March 22 that the bill had passed, Smith & Nephew (NYSE:SNN) officials were still unclear on the impact the excise tax would have on their business. In fact, Frazzette said last weekend’s NCAA basketball tournament probably got more billing in Monday morning meetings than the device tax, mainly because there just wasn’t enough information to make any informed decisions.

"We were trying to figure out who had St. Mary’s and Cornell," Frazette said with a laugh.

However, he stressed, the company is seriously concerned about how much of a burden it would absorb.

"It’s not a good thing," Frazette said. "That money is going to have to come from somewhere, because we run a pretty tight business as it is."

Even so, SNN isn’t exactly battening down the hatches just yet.

"The reality is that we run a global business, and while the United States is our largest market, more than 60 percent of our business is outside of the U.S.," he said. "The tax will certainly have a big impact, but it doesn’t stop the wheels of progress."

How big a tax burden London-based Smith & Nephew has to pony up remains to be seen. Based on Frazette’s 40 percent estimate for U.S. sales and the $3.7 billion the company posted in worldwide revenues last year, Smith & Nephew would have been on the hook for $34 million annually in extra taxes had the tax been in effect last year. The company reported profits of $723 million in 2009.

Medtronic Inc. (NYSE:MDT) CEO Bill Hawkins also tore into the tax.

"This will make us one of the highest-taxed regions in the world, and that’s going to have an impact on the appetite for people to invest in medical innovation," Hawkins told the Wall Street Journal, adding that Medtronic could wind up slashing its workforce by 1,000 to absorb the cost of the excise tax.

AdvaMed president and CEO Stephen Ubl expressed the industry’s tepid support in prepared remarks.

"While we remain concerned about the effects of the medical technology tax, we applaud expanded insurance coverage for millions of American families and the significant progress in a number of important areas, including an enhanced program of clinical comparative effectiveness research that will improve medical decision-making and enhanced transparency in the financial relationships between providers and the healthcare industry," Ubl said. "As Congress and the Administration move forward with implementing this reform legislation, we urge them to always consider the potential impact of policy changes on future innovation and medical progress."

The 2.3 percent excise tax marks a change from prior proposals in Senate and House measures. The Senate’s bill, which passed Dec. 24, 2009, and would have had the roughly $2 billion-per-year tax begin in 2011. (In December, an amendment sponsored by Evan Bayh (D-Ind.) and Amy Klobuchar (D-Minn.) to push the date back to 2013 wasn’t adopted in the final Senate bill.)

Earlier Senate proposals pegged the industry’s contribution at $40 billion over 10 years, drawing howls of protest from industry advocates and a $15 billion counter-proposal.

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