Med. device makers say tax will hurt

FROM LEFT: Ximedica Chairman Stephen Lane, Chief Innovation Officer Aidan Petrie and Consumer Health Care Program Director Margaux Boyaval. / PBN FILE PHOTO/FRANK MULLIN
FROM LEFT: Ximedica Chairman Stephen Lane, Chief Innovation Officer Aidan Petrie and Consumer Health Care Program Director Margaux Boyaval. / PBN FILE PHOTO/FRANK MULLIN

Local medical-device makers stop short of predicting layoffs or outsourcing, but say the 2.3 percent tax on medical-device sales included in the U.S. health care law will certainly be a competitive disadvantage, which could indirectly lead to job losses.
“It will certainly have a negative impact, although we have not examined it closely in terms of what it will mean for us,” said Scott Rader, president and CEO of IlluminOss Medical Inc. in East Providence. “I think it will affect investment and that can affect job creation or the very valuable jobs connected with selling medical products.”
While the medical-device industry often brings to mind giants such as Covidien or Boston Scientific, the implications for smaller, early-stage medical companies like IlluminOss are more often cited as a concern.
Unlike, say, corporate income tax, the medical-device tax will be charged to companies on their gross revenue regardless of whether they are profitable or not.
Even if 2.3 percent doesn’t put a dent in the multibillion-dollar profits of a Covidien, they could be more damaging to a company like IlluminOss, which is still in clinical trials and pre-commercial.
And so the industry alliances that have mobilized against the tax since it was passed along with the rest of the Patient Protection and Affordable Care Act in 2010 have focused on what it might do to the small and emerging players in the medical-device world.
“A lot of these smaller companies who do not have products yet and do not have profits will still have to pay this on their first sales,” said Wanda Moebius, spokeswoman for AdvaMed, an industry trade and lobbying group. “This is an industry dominated by these small companies and they do a lot of research.”
According to AdvaMed, the Unites States medical-device industry exported $5.4 billion more than it imported in 2011, although that margin has been shrinking in recent years. The group, which pegs the number of Rhode Island medical-device jobs at 4,200, estimates that the new tax could result in the loss of 43,000 American jobs.
Worldwide, Mansfield-based Covidien employs approximately 42,000 people and, based on current sales, would pay $100 million in annual excise tax starting in 2013. Last year Covidien had $2.4 billion in operating income from $11.6 billion in sales. Covidien opposes the tax and shares the concerns of the industry that it will curtail research and development spending, but spokesman Bruce Farmer said the company has not planned to change how it operates because of the tax.
“Broadly speaking, it is likely that companies will have to lower R&D spend or potentially require higher health care costs to pass on to consumers, which makes us less competitive,” Farmer said. “A lot of the smaller companies are more the concern. We have increased our R&D spend every year since being spun off from Tyco.”
Another concern with the tax is that it will prompt companies to move operations overseas.
This summer Covidien opened a new plant in Shanghai, but Farmer said the expanded operations and research in Asia are intended to develop products specifically for the large customer base there, not because of American tax policy.
Farmer said Covidien now has $1 billion in sales to emerging markets and the company intends to double that in three to four years.
Stephen Lane, chairman of Providence-based Ximedica, who described the coming medical-device tax as a “storm cloud” looming over the industry, said medical-device research and development investments migrating to Asia will likely take more manufacturing with it.
“They are not going to make products that are designed in Israel or Canada or Singapore in New England,” Lane said. “On a federal standpoint that has already begun to affect where manufacturing is going to happen five to 10 years from now.”
C.R. Bard Inc., which owns Warwick medical-device maker Davol Inc., also opposes the medical-device tax, but said it has no current plans to cut back.
“It will impact innovation and impact the ability to invest in facilities, making Bard and the industry less competitive,” said Bard spokesman Scott Lowry. “But we have no specific plans at this time to do anything anticipatory.”
When authors of the Affordable Care Act included the device tax, their rationale was that by increasing the number of Americans with health insurance, the law would boost sales for device makers. In theory that would balance out the new charge, which is expected to raise between $20 billion and $30 billion in federal revenue to pay for subsidized care for the poor and other aspects of the law. Opponents of the tax argue that most medical-device users are older and covered by Medicare, so they will see a minimal increase in sales.
Efforts to repeal the tax have quickly turned into a 2012 campaign flashpoint.
Just before the Affordable Care Act was ruled constitutional by the Supreme Court in July, Republicans in the U.S. House, along with 37 Democrats, passed a bill to repeal the tax. It did not move in the Senate.
Rhode Island’s two Democratic House members, Reps. David N. Cicilline and James R. Langevin, voted against the Republican bill, but say they are open to getting rid of the medical-device tax if another way to raise the revenue for the health law can be found.
“The health care law is not perfect, and just as Congressman Langevin supported the effort to roll back burdensome small-business reporting requirements, he is open to modifying or repealing the medical-device tax if Congress can agree on a reasonable way to pay for it,” said Langevin spokesman Jonathan Dworkin in a statement.
At a Rhode Island School of Design event where the issue was raised with Lane, Cicciline said he was also open to revisiting the device tax, but not at the expense of the rest of the Affordable Care Act.
The Republican bill proposed offsetting the lost tax revenue with changes to how people qualify for health care subsidies and rules for people with tax-advantaged health savings accounts.
“The future of manufacturing in America is high-tech manufacturing and if we want to have this conversation about bringing it back, then a place to start is not adding specifically targeted taxes to the industry,” said Ian Prior, spokesman for Cicilline’s Republican challenger, Brendan Doherty, who supports the House-passed bill.
Calls to Anthony Gemma, who is challenging Cicilline in the Democratic primary, were not immediately returned.
In the Massachusetts Senate race, Republican Sen. Scott Brown has pushed for repeal, and his Democratic challenger, Elizabeth Warren, has joined him. •

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