Medtech slams gov’t report on medical device tax

Medtech executives last week bashed a newly updated report from the Congressional Research Service refuting claims that the medical device tax kills jobs and hampers innovation.

The 2.3% excise tax, enacted in 2010 as part of the Affordable Care Act, went into effect at the beginning of 2013. It applies to all U.S. sales of prescribed medical devices. The medtech industry has fought the tax tooth and nail since even before its inception, as Democrats crafted the healthcare reform bill that became Obamacare.

Industry advocates have claimed that the tax could claim as many as 43,000 jobs and force companies to scale back R&D. But the non-partisan CRS analysis, which was updated last fall, claims the levy’s impact is "relatively small" and will only cost the industry about 1,200 jobs.

"Opponents of the tax claim that the medical device tax could have significant, negative consequences for the U.S. medical device industry and on jobs. The estimates in this report suggest fairly minor effects, with output and employment in the industry falling by no more than two-tenths of 1%. This limited effect is due to the small tax rate, the exemption of approximately half of output, and the relatively insensitive demand for health services," according to the research service.

"The analysis in this report suggests the effects on small as well as large firms will likely be minimal because the tax is expected to be passed on in price and the decrease in demand would be negligible. As in the case of virtually all industries, the share of firms is concentrated in smaller firms but output and research are concentrated in large ones," according to the CRS report.

And medical innovation may in some cases have overstated benefits, CRS said.

"In discussing innovation in the medical device industry, it is important to note that innovation for innovation’s sake does not always lead to the most efficient economic growth path in the healthcare industry. Some have argued that the rapid adoption for high-technology equipment and medical procedures has been a significant contributor to rising health care costs in the past," according to the report.

Predictably, medtech executives interviewed by MassDevice.com slammed the report as nonsensical and out of touch with how the medical technology industry really works.

"I think it’s pretty insulting for anyone to say that you can take 2.3% of someone’s revenue and not have an effect on their business," Zoll Medical CEO Richard Packer told us. "The de minimis numbers in this report are an insult. It’s illogical. It comes from academic types that have never run a business, never tried to balance their books, never tried to hire more people based on the revenues coming in. It’s just silly. There is no doubt that this tax hurts innovation. There is no doubt about it meaning less money for R&D. It can’t help the development of new technologies."

The most discretionary portion of companies’ budgets is R&D, Packer explained, because cutting back doesn’t have an immediate impact on the bottom line.

"When you’re in stress, you don’t do as much R&D, but you pay for that down the line," he said. "You can’t cut production, because you need the equipment that drives the business. If you have extra money, you do more R&D. We have a list of projects in my company, and most every other company like this, that are not being worked on because we don’t have enough resources to work on them. So we prioritize based on how much we can spend. We draw a line and anything above the line we work on and anything below will have to wait. If you were to give me money back, I could move that line down."

Another company that held back projects because of the medical device tax is Irvine, Calif.-based Masimo (NSDQ:MASI), CEO Joe Kiani told MassDevice.com.

Masimo was set to embark on a 10-year R&D initiative that Kiani said could have resulted in the hiring of hundreds of employees. But Masimo chose to shelve the initiative because of the device tax’s $10 million annual price tag.

Kiani scoffed at the idea that companies could simply raise prices on their customers, noting that almost all of his contracts with hospitals and group purchasing organizations are based on 5-year terms.

"If we could raise prices, doesn’t that defeat the whole reason for the Affordable Care Act? The consumer is Medicare, so they’re paying for it all over again. That makes no sense," he said. "We’re in a competitive business, we have competitors. The 1 thing we can’t talk to each other about is pricing. We’ll go to jail for that. On top of that, contracts with hospitals are several years and with group purchasing organizations that represent many hospitals for several years, so we can’t go out and seek price increases. As this medical device tax came out, the GPOs and hospitals made it very clear to these vendors that ‘you better not raise our prices.’"

Kiani added that, unfortunately for most device companies, follow-on contracts rarely increase prices.

"The new contracts are always at a lower price," he said. "We’re lucky if it’s the same price."

The good news for medical device companies is that it doesn’t seem like the CRS report will slow the momentum for repeal, which is enjoying a resurgence as Republicans take control on Capitol Hill.

Rep. Erik Paulsen (R-Minn.) told MassDevice.com that he’s as optimistic as he’s ever been that the medical device tax will be repealed by the 114th Congress, perhaps as soon as the end of the 1st quarter. Paulsen’s latest bid to repeal the tax, the Protect Medical Innovation Act of 2015, has more than enough co-sponsors at 272 to pass the House.

"We’ve been in a scoring position before. Now I feel we have a really good opportunity to line up the stars and make it happen," Paulsen told us.

The new balance of power in the Senate guarantees a vote in the Upper Chamber, he added, noting that Sen. Orrin Hatch (R-Utah) renewed his commitment to repealing the tax during a recent Republican party retreat. Hatch is chairman of the powerful Senate Finance Committee.

Although repealing the tax has friends on both sides of the aisle, a common refrain from Democrats is the need for a so-called "pay for" to offset revenues lost from repealing the levy. Paulsen’s bill doesn’t have an offset, which he said is par for the course in writing legislation.

"Typically a pay-for is not introduced with the bill, but leadership figures it out," Paulsen told us. "I’m not worried about the pay-for. – we’ve done bipartisan pay-fors in the past, and this has such widespread support."

Estimates of the impact of the medical device tax have varied wildly since its 1st airing in 2009; 4 years of political deadlock, which included a federal government shutdown over the issue, have done little to add clarity. Federal government officials have projected that the tax will raise about $30 billion over 10 years. Back in July 2013 a report released by a coalition of medical device lobbying groups estimated that the tax had cost the industry $1 billion during the 1st 6 months of that year.

But in July 2014, MassDevice.com learned via a Freedom of Information Act request to the Internal Revenue Service that the tax bureau collected only $1.4 billion from the medical device tax in 2013, far short of all predictions. Then an audit by a U.S. Treasury inspector general revealed that the IRS collected a little more than $913 million during the 1st half of 2013, well shy of the $1.2 billion it expected the tax to bring in.