COLUMBUS, Ohio — BioOhio and LifeScience Alley, the state biotechnology development organizations in Ohio and Minnesota, have joined 20 other industry groups asking legislators to limit the medical device taxes or fees proposed in both the House and Senate versions of health care reform.
Congress and the Obama administration are hoping new taxes and fees on some health industry players (among other groups) will raise enough money to pay for expanding health care insurance to cover most Americans. Many legislators and officials also think that if an industry gets more business because of reform, it should help pay for reform.
Rumor has it that the medical device industry was conspicuously absent from the White House bargaining table this summer while other health care stakeholders — Big Pharma, health insurers, hospitals, doctors’ associations — were lobbying to limit the costs of reform on their industries.
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Medical device makers learned about the proposed taxes in September when the Senate Finance Committee floated an early version of its health reform bill, which included an annual fee, based on market share, aimed at raising $4 billion a year from their industry (pdf), said Cara Bachenheimer, senior vice president of government relations for Invacare Corp. and the Elyria, Ohio, home health care product-maker’s chief lobbyist.
In the bill passed by the Senate in December, that fee was lowered to raise $2 billion a year, starting in 2011, and then $3 billion a year, starting in 2017. Companies with less than $5 million in annual sales would be exempt from paying the tax, and companies selling between $5 million and $25 million would be taxed on half of their U.S. sales. Meanwhile, the House reform legislation calls for a 2.5 percent excise tax on medical devices sales in the United States, expected to raise $20 billion from 2013 to 2019.
The proposed taxes and fees have brought the medical device industry to the table.
In a Jan. 15 letter to House Speaker Nancy Pelosi, a California Democrat, and Senate Majority Leader Harry Reid, a Nevada Democrat, 22 organizations including the industry’s leading associations, the Advanced Medical Technology Association, better known as AdvaMed, and the Medical Device Manufacturers Association, asked legislators to limit taxes on medical devices by:
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- Collecting no more than $20 billion in taxes from 2010 to 2019.
- Graduating the tax to lessen its impact on small companies.
- Starting to collect the tax after health care coverage is expanded — not before.
- Setting a fixed tax rate or fee, enabling companies to plan better.
- Making the tax deductible on corporate income tax returns.
Staff members of both Pelosi and Reid did not return a reporter’s emails asking for the legislators’ comments on the organizations’ requests.
A. Malachi Mixon III, chairman and chief executive of Invacare, is a rare CEO who is vocally opposing the proposed tax. Mixon said the medical device sales tax unfairly targets his industry to pay a disproportionate share of covering more people with insurance. “Second, if there is to be a tax, it ought to be based on profits or gross margin, not on sales,” Mixon told MedCity News last week. In addition, the tax “ought to be delayed to give companies time to figure out how to pay the tax.”
Invacare disclosed in a regulatory filing two weeks ago that it expects to pay between $12 million and $14 million a year on U.S. sales of medical devices. To start saving money this year to pay the tax that’s due next year, Invacare has “already taken steps to suspend matching contributions under its 401(k) retirement plan, suspend merit pay increases for management employees and freeze new hiring,” according to the filing.
Only one of Mixon’s hopes — giving companies more time to figure out how to pay the tax — were included in the limits endorsed by the device organizations in their letter to legislators. Invacare belongs to the Medical Device Manufacturers Association, one of the letter’s signers.
“I call this the lowest common denominator type of letter” aimed at getting a large number of organizations to sign on, Invacare’s Bachenheimer said. “Everybody agrees on the tax deductibility and a later effective date.”
The organizations did not ask the legislators to apply the tax to profits rather than sales. So, a company that loses money on its sales would still be liable to pay the tax.
Bachenheimer and Invacare would take the graduated tax for small businesses in a different direction: “Our position on that is the initial $100 or $150 million in sales should be exempt” from taxes, no matter how big or small the manufacturer, she said. “We believe that would be more fair” and also would accomplish the goal of exempting small companies from paying the tax.
Robert Schmidt, founder and chairman of one of those small companies, Cleveland Medical Devices Inc., better known as CleveMed, said he agrees with the associations’ “attempt to moderate the effects the tax will have on medical device companies.” Schmidt also acknowledged the attempts as a potential compromise of the provisions proposed by Congress.
But he is opposed to any “tax on all manufacturers in an industry that is so vital to the growth of our economy,” Schmidt said in an emailed response to a reporter’s questions. The tax is particularly onerous because it taxes all companies in the industry, whether or not they benefit from the legislation.
