Ohio’s medical device makers are still trying to figure out what the new 2.3 percent sales tax on their products–compliments of health care reform–will mean for them.
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.
Undoubtedly, the largest medical device makers will pay the biggest tax bills. However, size also means manufacturers could pass along the tax as a price increase to customers. Small device makers may not be able to do that. And some fear the new tax will deplete research and development budgets, which could significantly hinder medical device innovation.
Apparently, legislators thought industries that stood to get business from reform–covering 32 million more Americans with health insurance means they’d pay for more care, right?–should pony up more tax dollars. But because a majority of medical devices from bed pans to heart valves already are paid for by the federal Medicare or Medicaid programs, most medical device makers say they don’t expect much extra business from the new law.
Invacare Corp., the Elyria company that makes home health care products and supplies, was bracing for a meaner tax than the one President Obama signed into law on March 23 and amended on March 30. In early January, Invacare suspended matching contributions to employees’ 401(k) retirement plans and merit pay increases for management, and froze new hiring to start saving money to pay the tax, which then was due in 2011. At that time, Invacare was planning on paying between $12 million and $14 million a year in new taxes.
Then, the tax was 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. But now the tax is deductible and it’s three years away–both reprieves wrought by 11th-hour amendments, said A. Malachi Mixon, Invacare’s chairman and CEO.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Another change, the tax applies to all medical devices, Mixon said. Under a prior proposal, only Class II and Class III medical devices would have been taxed at a rate of 2.9 percent.
Invacare makes Class I devices, simple products like bathtub transfer benches and walking canes, and Class II devices, complex, rehabilitative wheelchairs and oxygen systems. The company does not make Class III medical devices, such as heart stents or implanted defibrillators.
Invacare hopes that some or all of its products will be exempted from the tax. The reform law says exemptions include: “eyeglasses, contact lenses, hearing aids and any other medical device determined by the [Treasury] secretary to be of a type that is generally purchased by the general public at retail for individual use.”
“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 health reform law, AtriCure Inc., a much smaller maker of surgical devices in West Chester, was harmed by the changes. The maker of devices that scar the heart to disrupt bad electrical signals, among other uses, would have been exempt from the tax under previous revisions of reform legislation.
AtriCure lost $16.5 million last year. But the company would have paid a $1.3 million tax bill on revenue of $54.5 million, had the new tax been in place in 2009.
“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 Julie Piton, the company’s chief financial officer.
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.”
Large companies like Invacare will think about raising its 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 small device companies, which abound in Ohio, “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.”
What about medical device start-ups?
In January, Robert Schmidt, founder and chairman of development company Cleveland Medical Devices Inc., better known as CleveMed, said he is opposed to any “tax on all manufacturers in an industry that is so vital to the growth of our economy,” he said in an emailed response to a reporter’s questions.
