WASHINGTON — Medical device makers are hoping a renewed push on Capitol Hill in the new Republican-controlled Congress will halt a tax imposed on their products by the Affordable Care Act.
The 2.3 percent excise tax on revenue kicked in last year to offset covering an estimated 25 million uninsured Americans. It applies to most products used in clinical settings.
Since its conception as a financial pillar of health care reform, the tax has been the target of the industry that includes 6,500 manufacturers nationwide, and 1,500 in California. The medical device industry has argued it hampers growth and hiring.
With GOP gains last month that will put Capitol Hill completely in Republican control, device makers are optimistic that Congress will repeal the tax next year. They also point to bipartisan support, with liberal Democrats such as Sen. Chuck Schumer, D-N.Y., and Elizabeth Warren, D-Mass., responding to industry executives in their states.
The new Congress starts in January. Many Republicans campaigning before the midterm election made repealing the 2010 Affordable Care Act — President Obama’s signature legislative achievement — a priority in the new session.
Obama has said he is open to reconsidering the tax. “Let me take a look comprehensively at the ideas that (Republicans) present,” he told reporters the day after the Nov. 4 GOP landslide.
Nationally, medical device trade associations paint a dire picture of their industry since the tax went into effect. A survey by the Advanced Medical Technology Association reported a loss of 14,000 jobs and the cancellation of 19,000 planned hirings.
The Medical Device Manufacturers Association, which represents smaller companies, surveyed 150 members and found that two-thirds of respondents were either cutting jobs or moving them outside the U.S., and 47 percent of respondents were cutting research and development budgets.
Divergent opinions
Sen. Barbara Boxer, D-Calif., supports the tax, saying repeal would cause “a $30 billion increase in the deficit.” But she has said she’s open to exemptions for small medical device firms.
Sen. Dianne Feinstein, D-Calif., appears somewhat more sympathetic to the industry’s complaints. “California is home to approximately 1,500 medical device companies, so I was a strong supporter of reducing the medical device tax to half of the rate initially proposed during the debate on the Affordable Care Act,” she said in a statement. “If a new proposal is offered to reduce or repeal the device tax, I will look closely at its fairness and benefit.”
California is the nation’s leading state for medical device production, said Todd Gillenwater, CEO of the California Healthcare Institute, a trade association in La Jolla (San Diego County). Device companies employ 75,000 people in California — about 19,000 in the Bay Area — and pay on average $87,000 a year.
“It might not have the renown of Silicon Valley, but it is a significant and growing segment of the California economy,” Gillenwater said.
$1 million cost
For Dfine Inc., a San Jose maker of devices used to treat vertebral compression fractures and destroy spinal tumors, the tax has cost about $1 million since it was imposed in 2013. The lost revenue has dampened the privately held 10-year-old company’s research and development budget and delayed its long march toward profitability, said CEO Greg Barrett.
“We’ll probably turn profitable in about a year, but would have turned profitable a year ago without the device tax,” he said.
As a small company with 150 employees, Dfine depends on venture capital to underwrite its product development. Barrett said a single device sometimes requires an investment of $100 million before it can be sold commercially.
“If the venture capital world feels like the government is a threat to the medical device industry, they take investment dollars and go elsewhere,” he said. “As result we lose our innovation, the R&D that ultimately leads to better patient care.”
A report this month by the nonpartisan Congressional Research Service said that while the tax is “challenging to justify,” the impact on the overall industry is “fairly minor” — amounting to output and employment falling by no more than two-tenths of 1 percent.
Rather than hurt research and development of new products, companies are likely to offset the tax by passing the cost on to consumers, the report said. (An analysis of the Congressional Research Service report by the Advanced Medical Technology Association called it “fundamentally flawed.”)
Supporters of the tax point to the report as evidence that the medical device industry is alive and well, and is exaggerating fears of job losses and stifled innovation to bolster its lobbying effort on Capitol Hill.
“These companies have been highly profitable, by their own admission” said Lisa Swirsky, a health policy specialist atConsumers Union. “It sounds like they’re crying wolf.”
Innovative products
The marketplace is the industry’s ultimate key to success and a truly innovative product will find its proper niche regardless of the tax, critics say.
“The medical equivalent of an iPad will take off despite the tax,” said Paul Van de Water, a health policy fellow at the Center for Budget and Policy Priorities. “If not, it’s for reasons that have nothing to do with the tax. There are very few innovations for which the tax will make the difference between profitability and non-profitability.”
Van de Water and other industry critics fear that congressional repeal of the device tax will provoke a stampede for equal treatment among other Affordable Care Act stakeholders paying similar taxes, including the insurance industry.
The tax exempts eyeglasses, contact lenses, hearing aids and other common retail items.
A Consumers Union study by Swirsky concluded that the industry’s largest companies had profit margins so high that the tax would have a negligible impact. For instance, Johnson & Johnson’s device division booked $7.1 billion in operating profit in fiscal 2012. The tax would reduce that amount to $6.8 billion.
The five largest medical device companies, including Johnson & Johnson, Medtronic and GE Healthcare, accounted for 28 percent of industry sales, according to a survey cited in the Congressional Research Service.
The industry counters that most device makers are small, pointing to Commerce Department data that show 80 percent of them employ 50 or fewer.
But even if the tax were to have an impact on smaller businesses, “why let the big guys off the hook without paying their fair share like other stakeholders?” Swirsky said.
Date: December 9, 2014