Device Makers Seek Tax Repeal

Monday, December 1, 2014

Source: Times Union

Medical device makers in New York and elsewhere are hopeful that a renewed push on Capitol Hill in the Republican-dominated 114th Congress will cause the Obamacare-imposed tax on their products to flat-line.

The 2.3 percent excise tax on revenues, projected to bring in $29 billion over 10 years, has been a target of the nation's 6,500 device manufacturers ever since its conception as a financial pillar of the controversial 2010 Affordable Care Act — aimed at making health insurance available to an estimated 25 million uninsured.

Now, with GOP gains on Election Day that will put Capitol Hill completely in Republican control, device makers are quietly optimistic Congress will repeal the tax next year.

They also point to bipartisan support for repeal, with liberal Democrats such as Sens. Charles Schumer of New York and Elizabeth Warren of Massachusetts responding to industry executives in their states.

And although the Affordable Care Act represents Obama's signature legislative achievement, the president did not slam the door on repealing the tax. "Let me take a look comprehensively at the ideas that (Republicans) present," he told reporters the day after the Nov. 4 GOP electoral landslide.

Schumer, a strong supporter of the Affordable Care Act, is among the most high-profile Democrats favoring repeal. His press office would say little about his views on the tax other than to confirm his opposition to it.

Sen. Kirsten Gillibrand could vote for repeal "depending on how it's paid for," according to her communications director, Glen Caplin. This puts the New York senator in line with other Democrats such as Sen. Chris Murphy of Connecticut, who fear repeal could "blow a hole in the budget," as he put it.

The tax, which underwrites subsidies and other costs of providing coverage to an estimated 25 million uninsured, applies to most products used in clinical settings. But it exempts eyeglasses, contact lenses, hearing aids and other commonly used retail items.

Nationally, medical device trade associations paint a dire picture of what is happening to their industry since the tax went into effect at the beginning of 2013. A survey by the Advanced Medical Technology Association — AdvaMed — reported job reductions of 14,000 and canceled hiring of 19,000. The Medical Device Manufacturers Association, which represents smaller companies, surveyed 150 members and found two-thirds of respondents were either cutting jobs or moving them outside of the U.S., and 47 percent of respondents said that they were cutting their R&D budgets.

New York is a medical device leader, No. 8 in the nation, according to Jessica Crawford, president of MedTech, a Syracuse-based association of biomed companies in New York. The industry directly supports 25,000 at medical device companies and another 55,000 indirectly at suppliers and support operations, she said.

"This is a horrible tax," said Joseph DeVivo, CEO of Angiodynamics Inc. in Latham. "To make room for $4.3 million (in tax payments), we've had to cut $2 million in jobs and $2 million in R&D. Every year that goes by, that's less investment and less people, period."

Angiodynamics, with 900 employees in the Capital Region, makes products for cancer treatment and "peripheral vascular intervention" — blood supply to arms and legs. The company booked sales of $354 million in fiscal 2014.

The company has reduced its workforce by 80, but DeVivo said the reduction was attributable to other factors apart from the tax. Among them: "Rightsizing" the company after three acquisitions in 2012.

Lawmakers originally based the tax on the likelihood that medical device makers would gain a windfall with so many uninsured gaining coverage.

But DeVivo called this view" an ignorant argument" because there is no fixed pricing and hospitals are looking to reduce their own costs through bargain hunting.

"We're already giving at the office," he said. "We are not the problem."

Executives at Welch Allyn, a Skaneateles Falls-based maker of devices for physical exams, patient monitoring and blood-pressure measurement, initially attributed layoffs of 275 employees in 2012 to the device tax.

But in reality, the job losses were part of a broader reorganization to better position itself in the device marketplace, said the company's CEO, Stephen Meyer.

"The device tax certainly played an important role in our 2012 restructuring," Meyer said in a statement. "We also believed, and stated at the time, that to remain competitive we needed to adapt to the pressures that health reform and a changing global marketplace would bring, including industry consolidation, downward pressure on prices, and more competition from around the world."

A report earlier this month by the non-partisan Congressional Research Service said that while the tax is "challenging to justify," the actual 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 AdvaMed analysis of the CRS report 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 pumping up fears of job losses and stifled innovation to bolster its repeal lobbying effort on Capitol Hill.

"These companies have been highly profitable by their own admission," said Lisa Swirsky, a health policy specialist at Consumers Union. "It sounds like they're crying wolf."

Ultimately, the marketplace is the industry's 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 similar treatment among other Obamacare stakeholders paying similar taxes, including the insurance industry.

A Consumers Union study authored by Swirsky concluded the industry's largest players had profit margins so high, the tax would have a negligible impact. For instance, Johnson & Johnson's device division booked $7.1 billion in operating profits in fiscal 2012. The tax would reduce that 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 CRS report.

The industry counters that most device makers are small, pointing to a Commerce Department data that 80 percent of them employ 50 or fewer.

But even if the tax were to have an impact on smaller players, "why let the big guys off the hook without paying their fair share like other stakeholders?" Swirsky said.

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