By Kem Hawkins, president, Cook Medical
Patients, their loved ones and physicians depend on American medical device companies for breakthroughs. Who has not had a sick family member touched by a disease? Who does not know somebody who has benefited from an innovative device? Anybody suffering from coronary or peripheral artery disease, cancer or any of a host of serious illnesses wants and deserves the best technology available.
That’s why a 2.3% tax on medical device sales that goes into effect in under a year is such a disturbing development. Companies, in order to pay a new tax bill, will have no choice but to slash research and development spending and that, in turn, will inevitably mean fewer medical advances. While companies will get a new and much larger tax bill, even before they show profits or pay an employee, patients and their loved ones will pay the steepest price. How many cures and treatments will go undeveloped? How much suffering will be prolonged? How much hope will fade?
Investment that might otherwise have been devoted to clinical trials, research and development and plans to create more effective devices, thereby expanding the horizons of modern medicine, will now, instead, go to the taxman. Patients will be left in the lurch.
This short-sighted medical device tax imposed on top-line sales in 2013 guarantees a loss of at least 43,000 U.S. jobs, according to a study from the trade association AdvaMed. We think the total will be even higher as device manufacturing lay-offs ripple through supply chains, killing jobs and harming workers in sectors like logistics, material suppliers, trucking and consumer goods.
This tax, which takes the U.S. rate on some American medical device companies to 55 percent of earnings, will also lead firms to shift factories and jobs overseas to low-tax nations like Ireland or, closer to home, Costa Rica, Mexico and Canada. It’s important to note that these jobs are not disappearing. They will still exist. Just not in America.
It’s happening already in the so-called Catheter Valley in upstate New York; in Michigan where Stryker has announced that 1,000 lay-offs are pending nationwide because of this tax; and in Minnesota, Massachusetts, California, North Carolina and many other epicenters of the device industry. Although the tax does not go into effect for a year, companies do not have the luxury to wait and see. Production planning is critical and takes time. It takes months to hire workers, set up factories, transfer technology, train workers and then produce devices. Few companies will wait until 2013. Companies compete in a global marketplace, and this tax places American companies at a distinct disadvantage.
Device companies in China, Eastern Europe and in emerging economies like Brazil and India will be able to produce products cheaper as rent is less, cost of raw materials is less and often subsidized and cost of equipment is less because that equipment, too, comes from low-tax nations. Labor is less, the cost of distribution is less, currencies are manipulated, companies get tax credits instead of a bigger tax bill… well, the picture gets pretty dire pretty quickly.
What our industry needs instead of a new tax is revitalization. We need options to keep companies viable and located in the U.S. by choice: tax incentives to enable competition, transparent review processes for de nova devices, job credits for new factories and closer associations with physicians, who generate most of the ideas for new devices.
Instead, we get an experimental top line tax on sales. Whoever heard of such a thing? When this tax is applied to earnings it equals a 15% tax on every dollar of profit. Add that to the existing 35% corporate tax rate and the 5% tax device companies pay to most states and suddenly the cumulative tax bill for a typical medical device company rises to 55 percent of every dollar earned.
I don’t know if it’s ironic or immensely disappointing that political leaders are willing to watch a homegrown American industry that is dedicated to solutions implode under a banner of “doing good for all.” So far, 226 Congress members have agreed to co-sponsor H.R. 436 to repeal the tax, but the U.S. Senate has been slow to act.
Supporters of the repeal know that when this tax is imposed, American companies that hope to stay in business will have no choice but to find ways to cut costs if they are to compete with global companies – an increasing number of them from China. Remember, they (Chinese) are not selling direct in the U.S. (yet); but we (American owned Group Purchasing Organizations) are aggressively seeking them out and thereby providing profit for those companies to use to gain market share from U.S. device companies.
To date, U.S. companies have dominated this sector with breakthrough technologies and staggering efficiency gains that have given Americans a multitude of employment opportunities while simultaneously fighting diseases. Even when we have a presence abroad it is good for keeping innovation held within American companies because of global patents that accrue to U.S. firms.
While good ideas can come from anywhere on the globe, we should all do what we can to ensure that American companies keep our innovative edge. That can’t happen with a tax rate that approaches 55%.
America needs to think through the consequences of our tax and regulatory policies. American patients deserve safe and effective devices and deserve to have them first. Patients should not be denied the latest technology because of a regulation or tax. If we can put a man on the moon we can approve safe and effective devices more efficiently than other nations and do it with a tax code that supports new technology.
If we fail to repeal this tax because of philosophical differences or party affiliation, that job-sucking sound that today is but a low hum will soon become a deafening roar. And U.S. patients will have no choice but to look to firms based overseas for hope, cures and breakthrough medical devices.
We can’t let that happen. Let your local officials know what’s at stake with this tax. Write to your Senators and Governors to ask for their help with the repeal. Medical device companies need to be heard. The well-being of millions of patients worldwide depends on it.
Kem Hawkins is president of Cook Medical, the world’s largest privately owned medical device firm.