Zoll CEO Packer on device tax repeal efforts: No pessimists on the front lines

Zoll CEO Richard Packer

As the medical device excise tax creeps closer to its planned launch date, all eyes are on Congress to see whether medtech lobbying efforts will yield a win for the industry.

While lawmakers weigh the tax and argue their way toward the so-called fiscal cliff, device industry stakeholders are placing their bets on whether or not the excise tax will survive until January.

A MassDevice.com snap poll also showed substantial pessimism that the tax would be repealed or that the industry’s influence in Washington, D.C., would get very far.

"I would ask whether those people are close to the fight or not," medical device maker Zoll Medical’s CEO Richard Packer told MassDevice.com in an interview. "Most people don’t know what’s going on, they don’t recognize the magnitude of the letter that the Democratic senators sent to leadership, they don’t understand those things.  So they see tax accountants getting ready to figure this out they just assume that the tax is fait accompli."

Packer remains steadfast in optimism that the tax is not ‘fait accompli,’ or a done deal. He remains in conversations with lawmakers and their staff, and from his perspective the outlook is pretty rosy, he told us.

"From the tops of the organizations, we’re still very much engaged with conversations with the people in Washington.  We feel optimistic that, if there is a fiscal cliff package, the medical device tax is one of the items that is being discussed and worked into that package," Packer said. "I would doubt that anyone, such as myself, that is close to the conversation with Washington, that is spending time educating our legislators in Washington, would feel anything less than optimistic."

In an in-depth interview, Packer reflected on tax repeal efforts over the last year, mused about growing Democratic openness to considering challenges to the tax and warned of how the levy might affect Zoll and companies like it should Congress dive over the fiscal cliff without a parachute.

MassDevice: The medical device industry is less than 2 weeks away from the 2.3% sales tax. What’s the mood surrounding repeal efforts?

Rick Packer: I think there are there’s a lot of work that people are doing to begin to prepare, just in case we don’t get a repeal or we don’t get a delay, so in many companies people are looking at how to deal with the IRS regulations that came out and getting prepared just in case.

But I think, from the tops of the organizations, we’re still very much engaged with conversations with the people in Washington.  We feel optimistic that, if there is a fiscal cliff package, the medical device tax is one of the items that is being discussed and worked into that package. Whether that would be repeal or a delay is anybody’s guess.

If there is no package – if we just go off the cliff – then obviously we’re going to be faced with the tax and we’ll see what happens on the other side of the cliff. If someone picks up and begins to work on a   more comprehensive tax and spending package, then I think we’ll be on the top of that list as well.

MassDevice: Medical device industry groups are similarly confident, but a snap poll of our readers showed far less optimism that the industry’s influence in D.C. will get anywhere. What would you say to them?

RP:  I would ask whether those people are close to the fight or not. I think if you polled the Zoll employees they would represent your survey – most people don’t know what’s going on, they don’t recognize the magnitude of the letter that the Democratic senators sent to leadership, they don’t understand those things.  So they see tax accountants getting ready to figure this out they just assume that the tax is fait accompli [Editor’s note: an “accomplished fact”].

I would doubt that anyone, such as myself, that is close to the conversation with Washington, that is spending time educating our legislators in Washington, would feel anything less than optimistic.

MassDevice: What, specifically, are you seeing that’s got you feeling more confident?

RP: When I converse with staff – and you know most of the conversations are with staff, not necessarily with the legislators directly – they all have a good understanding of the impact the tax will have on jobs.  And they understand how important it is that this gets dealt with. And, while not universally, they fall on both sides of the aisle, both Democrat staff and Republican staff have a good understanding of the effect, especially on the effect on small business.

You know 98% of our industry is small; many of those companies aren’t profitable. They understand the simple arithmetic of then forcing them to become even less profitable. When I talk to staff they’ll say ‘oh yes I saw the announcement about Stryker’s layoffs or Welch Allyn’s layoffs or GE just had a massive layoff in the medical business as did Philips,’ and they’re putting those dots together themselves.

MassDevice: Are you still in discussions with lawmakers and their staff in these final days before the tax takes effect?

RP: Yes. We have many people that I reach out to, that I’ve become friendly with over the past 2 years of trying to campaign against, this and we compare notes and continue to make sure that they understand that this is really important and that there are many businesses, such as Zoll, that are really trying to hold back on making any actions to reduce costs to mitigate the tax, waiting for a delay or a repeal. So we continue to push, and I’m sure our industry associations are very active.

MassDevice: Are there specific roadblocks in the way?

RP: I think it really depends on the broader picture. No one can really tell whether there really is going to be a package that tries to create a balanced approach of spending and taxes or whether or not they’re just going to go off the cliff or even Boehner’s “Plan B” or whatever.  That’s way above my pay grade in terms of being familiar with anything like that.  In some ways we think that we’ve done most of the heavy lift – we have it on the agenda, it is bipartisan, people are tying it directly to jobs, they articulate what we have said and now I think we’re all just waiting for whether or not there’s going to be a broader package or not.

MassDevice: How will the device tax affect Zoll if the levy takes effect as planned in January?

RP: So we are fortunate in that our owners really have said don’t do anything – don’t make changes so long as there is a reasonable chance that the tax will be repealed or even delayed. We really haven’t had to create any mitigation.

Many companies are already moving forward because they can’t afford to wait. We’re lucky enough to have an owner that probably cares more about U.S. jobs than some other people do, so we haven’t done anything yet.

“In some ways we think that we’ve done most of the heavy lift – we have it on the agenda, it is bipartisan, people are tying it directly to jobs, they articulate what we have said and now I think we’re all just waiting for whether or not there’s going to be a broader package or not.”

But if we get on the other side and there is no movement – let’s say we just drive off the cliff and in January people are trying to pick up the pieces, and they’re trying to put a package together but there isn’t any real movement to he package, and it becomes obvious that nothing is really going to happen in DC – then we will have to try to mitigate the effect of the tax and that takes many forms.

It will mean slowing or stopping our hiring and pulling some money out of research and development that we otherwise would have spent this year in the coming years. We will look at moving some of our production offshore as a way to lower cost so that we can create money to pay for the tax.  There are many prongs to this strategy; no one thing will mitigate this tax for us. We will do a bunch of different things and hopefully it adds up to the whole tax or it gets close to most of the tax

MassDevice: How much does Zoll expect to owe if the tax survives?

RP: The effective tax rate for Zoll will be over 50% if you combine this tax with our corporate income tax, and so it’s obviously quite sizable.

MassDevice: Reflecting on this past year, how would you characterize the industry’s tax repeal efforts?

I think that this is really education.

When this tax came up it was put in at the 11th hour as a way to balance the books around the Affordable Care Act. It was put in based on flawed logic that because there are going to be more insured patients, just like pharmaceuticals or hospitals, the device industry would benefit and ergo a 2.3% tax – I mean it was twice that when they first started out –  would not be a problem, it would be offset by the windfall for the industry.  From its construction it was poorly conceived and not fact-based.

Early in the discussion – before the bill was signed, right after the bill was signed – it was all part of the fight over the affordable care act and nobody was open-minded to really understanding the facts. They didn’t want the facts to get in the way of the path of being able to say the Affordable Care Act was paid for. It was an inconvenient problem for them so no one was spending the time, no politician was open to listening to the argument. 

Over time – and especially in the last year when Democrats have been comfortable that the Affordable Care Act is here to stay, it’s not going to be threatened by changes to it – they looked to Massachusetts and said Massachusetts has had 50 or 60 changes to its law thus far, trying to strengthen it, make it more inclusive, make it work – they started to open their minds to the possibility that they may have gotten some pieces of it wrong.

I think the industry has done a very good job educating the legislators that the way medical devices are paid for and the way they’re reimbursed is not like pharma, it isn’t like hospitals, there is no windfall here. We did this survey comparing Romneycare in Massachusetts to growth in the industry and proved that when you have universal coverage it does not equate to an uptake in medical device utilization. So I think we gained a lot of momentum.

When  you look at Niki Tsongas the representative from Massachusetts who represents our district, the way she decide to vote to repeal the tax in the House was really just getting an understanding of how the medical device industry worked and how it’s paid for. Once she realized we don’t get paid for by the patient and that patient insurance is not what drives our industry she recognized that there was no windfall and this would be a problem for jobs – she’s got lots of medical technology in her district. Therefore when she could put all that together and feel comfortable that voting to repeal the tax would not threaten Obamacare, the Affordable Care Act, which is really important to representative Tsongas, she voted for repeal.

I think that is the same thing that’s happened with the senators from the Democratic side that signed on to the letter to their leadership – they came to understand that a change there would not threaten the Affordable Care Act and, at the same time, the construction and the premise by which this tax was based is false.  And clinging to something that’s false will just do damage, rather than changing it and avoiding the damage that will happen to our employees and to the industry if the tax isn’t mitigated.

So I’m really proud of what the industry has done. I think it is focused on education, education, education, and getting in front of members of Congress and their staff and taking them through the nitty-gritty of how our industry works as compared to pharma or hospitals.

MassDevice: The industry’s tax repeal efforts have been on an all-or-nothing track.  Why hasn’t there been a bigger push to modify the tax to protect small, pre-profit businesses?

RP: There’s always room to change something to create less damage, but if you want to create no damage you need to repeal this tax.

It’s the same logic that people use – the tax used to be $40 billion and now it’s only $20 billion, so we will all agree that $20 billion is less hurtful than $40 billion would have been – but if you do something for the small companies, which would be better than hurting everyone, it doesn’t mean that a company like Zoll isn’t going to shed jobs as a result of this tax.  We will.  And why would you want that?

“If you do something for the small companies, which would be better than hurting everyone, it doesn’t mean that a company like Zoll isn’t going to shed jobs as a result of this tax. We will.”

I think it’s been part of the education in that this is not just a small company problem. It’s most acute there, if you have to pay an extra tax when you’re not making money – that goes for other small- and mid-size companies that still aren’t making money – it’s most acute there.  But the pain on employment is going to be felt across the industry, regardless of size and you can see that in the people that are moving in advance of the tax and doing their restructuring. They’re mostly the big companies.

Boston Scientific has a $100 million tax bill if this tax stands. They’re not going to be able to just keep doing what they’re doing, keep making the investment that they’re making, expanding their factories where they’ve been able to expand, and absorb a $100 million dollar tax bill. It’s just not going to work.

We haven’t wanted to get into this false argument that somehow by creating less damage you’re creating no damage. The right thing to do is to recognize that this tax was poorly conceived, it is hurtful across the industry and it just needs to go away.

The medical device industry, obviously, is a jewel of the economy and this tax has the chance of really moving a lot more of it offshore and that is a very dangerous thing to do for the future of the industry, and for jobs in America.  It’s just silly to stay on the same track that we are on right now.

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