Opponents of the impending 2.3% medical device tax seem to be getting louder, as their voices appear in more news outlets and in more contexts as the levy looms in the near future.
The tax, contained in President Barack Obama’s landmark Affordable Care Act, aims to raise about $20 billion over the next 10 years from medical device manufacturers in order to pay for health care reform.
By taxing 2.3% of all device makers’ revenues, not profits, the levy is actually set to raise more than $30.5 billion, a MassDevice.com tax analysis uncovered.
As the industry approaches the Jan. 1, 2013, launch date for the tax, voices for repeal seem to be growing louder and appearing in more contexts.
"The tax is applied to sales, not profits, for medical device innovators, meaning that as businesses fighting for growth and success, they still owe taxes on each dollar of revenue even if they are not profitable," Ken Reali, president & CEO of Raleigh, N.C.-based device maker TranS1 (NSDQ:TSON), wrote in a recent editorial for Newsobserver.com. "The medical technology industry represents the small and mid-sized companies everyone is relying on for a brighter future, but bad policies like the medical device tax will prevent innovators, such as TranS1, from fully reinvesting in their business."
TranS1 reported $18.3 million in losses on $19.2 million in sales for 2011; had the device tax been effect, the company would have paid out about $442,000, pushing it deeper into the red.
An article in the Greater Fort Wayne Business Weekly this month noted the string of device makers which have reported layoffs ahead of the tax’s implementation, including Zimmer’s (NYSE:ZMH) decision to cut up to 170 positions, Stryker’s (NYSE:SYK) plans to lay off 5% of its total workforce, Cook Group’s halted plans to build 1 new U.S. manufacturing plant each year and Hill-Rom Holdings’ (NYSE:HRC) announcement that it would let go of 200 employees.
"You’re starting to see companies grapple in their own ways on how to deal with it," industry lobby AdvaMed spokeswoman Wanda Moebius told the paper. "We’re in an environment where we’re trying to create jobs, but this tax makes it hard to do that."
Despite Cook’s decision to cancel it’s U.S. plants, the company told Inside Indiana Business that it would not lay off any workers as on offset to the burden of the medical device tax, but that its expansion efforts would take a huge hit.
"We were talking about building some of these small plants every year in some town where they need the jobs," Cook chairman Steve Ferguson said in the interview. "We were going to pick around the mid-west communities that needed to have an increase in employment. With this tax, that money either has to come out of expansion, it has to come out of R&D, it has to come out of someplace, and it’s going to impact expansion in this country."
Between a complicated and slow-moving regulatory process and constraints in foreign markets, device makers will have to find new strategies to stay afloat – and that may mean shifting more manufacturing overseas, Ferguson told MassDevice.com in January.
"If you want to drive an industry outside of the U.S., that’s the perfect storm to do it," he told us. "It’s like you just threw another stone into the ship and it’s now sinking."
Anti-tax efforts have gained momentum in Congress, where a Rep. Erik Paulsen’s (R-Minn.) repeal bill has more than enough sponsors to pass in the U.S. House of Representatives and may come to a vote this year.
"As some of my colleagues have become more aware of what the consequences are, they’ve been paying more attention and just literally slowly signed on one after another after another almost every week for the last 6 months," Paulsen told MassDevice.com in February. "I actually expect that this is going to move forward in the House sometime this year, hopefully sooner than later. That’s a question that’s up to leadership."
Some analysts were less optimistic, noting that about 25 of the 66 members of the Medical Technology Caucus in the House have yet to sign on as co-sponsors to Paulsen’s bill.
"Without major constituent opposition to the excise tax, come January 2013, manufacturers will be subject to the new tax," federal health policy consultant Robert Betz wrote for the Journal of Healthcare Contracting. "This tax may indeed stifle medical device innovation in the future and cost needed jobs. Nevertheless, the stars are seemingly not lined up against this excise tax moving forward."
Another analyst had similar misgivings, adding that the device industry isn’t making enough friends in Congress.
"Well, here’s a memo to the medical device industry," HealthLeaders Media senior technology editor Scott Mace wrote. "If the medical device tax is so onerous, you need more allies to fight it."