By Mary Vanac
The tax on sales by “manufacturers, producers or importers” (PDF) of medical devices comes due in 2013 instead of 2011, as was originally proposed, so companies have almost three years to plan for paying the tax to raise $20 billion in 10 years to help pay for reform.
The largest medical device makers will pay the biggest tax bills. But the big players’ scale also gives them profit margins wide enough to absorb the hit, a luxury smaller device makers usually don’t enjoy. And some fear the new tax will deplete research and development budgets, which could significantly hinder innovation.
Apparently, legislators thought industries that stood to win more business from healthcare reform — giving 32 million more Americans access to health insurance means they’d pay for more care, right? — should pony up to help cover the cost of reform. But because a majority of medical devices, from bed pans to heart valves, are already paid for by Medicare or Medicaid, device makers say they don’t expect to see much extra business from the new law.
Invacare Corp. (NYSE:IVC), an Elyria, Ohio-based company that makes home healthcare products and supplies, was bracing for a meaner tax than the one President Obama signed into law March 23 and amended March 30. In early January, Invacare suspended matching contributions to employees’ 401(k) retirement plans, halted merit pay increases for management and froze new hiring to save up for the tax, then slated to kick in during 2011. At the time, Invacare was expecting a tab of between $12 million and $14 million a year in new taxes (the tax proposal then was for an industry fee designed to raise $2 billion in its initial years and $3 billion starting in 2017, rather than an excise tax on sales).
Now the company is looking at an annual tax of about $16 million, based on about $700 million of U.S. sales in 2009. The tax is deductible and it’s three years away — both reprieves wrought by 11th-hour amendments, Invacare chairman and CEO A. Malachi Mixon said.
The final legislation introduced another wrinkle, Mixon said: The tax applies to all classes of medical device, rather than only to Class II and Class III medical devices as envisioned under a prior proposal.
Invacare makes only Class I devices — simple products like bathtub transfer benches and walking canes — and Class II devices — complex, rehabilitative wheelchairs and oxygen systems. Class III products include implantable cardiac devices and cardiovascular stents. The company still hopes that some or all of its products will be exempted from the tax; the reform law exempts items that are typically sold over the counter, like eyeglasses, contact lenses and hearing aids.
“There are no rules yet” to interpret the law, Mixon said. “But all our products are used by individuals and are sold by our customers’ retail outlets. We will apply to the secretary [for exemptions], once the protocol and process is known.”
Unlike Invacare, which benefited from last-minute changes to the healthcare reform law, AtriCure Inc. (NSDQ:ATRC), a much smaller maker of surgical devices based in West Chester, Ohio, was harmed by the changes. AtriCure, which makes ablation devices for atrial fibrillation, would have been exempt from the tax under previous revisions of reform legislation.
Even though AtriCure lost $16.5 million last year, the company would have paid a $1.3 million tax bill on revenues of $54.5 million had the new tax been in place last year.
“Initially, there were some provisions that excluded companies with less than $150 million in sales or companies that don’t make money. And that was not in the final bill,” said AtriCure CFO Julie Piton.
Being subject to a sales tax from Day 1 “certainly raises some questions about the impact on these younger companies or developing companies,” Piton said. “So it’s definitely a big thing for the industry.”
Larger companies like Invacare will think about raising prices, among other measures, when the time comes, Mixon said. But smaller companies often don’t have that chance.
“We do not feel like we will have the opportunity to raise the price,” Piton said. “We have to delay our profitability, or if there’s some upside to volumes, that would obviously help us.”
For smaller device companies, “there’s really nowhere to go,” Piton said. “I think you’re going to see people either cutting costs or dealing with reduced profitability in the device companies.”
And what about medical device start-ups?
In January, Robert Schmidt, founder and chairman of development company Cleveland Medical Devices Inc., better known as CleveMed, wrote in an email that he is opposed to any “tax on all manufacturers in an industry that is so vital to the growth of our economy.”