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Sunday, 25 November 2012 23:24

Medical device makers’ hopes dimmed for tax repeal

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Stryker Corp. headquarters Stryker Corp. headquarters Courtesy photo

WEST MICHIGAN — President Barack Obama’s re-election dimmed hopes within the U.S. medical device industry that a new excise tax set to take effect Jan. 1 would get repealed.

Now device makers’ best hope is that Congress will delay the tax’s implementation as part of any agreement to avoid or mitigate the impact of the so-called fiscal cliff.

For now, however, manufacturers that had been hoping for a different outcome — and held off preparing for the 2.3-percent excise tax on the sale of medical devices registered with the U.S. Food and Drug Administration — need to move quickly to assure they comply.

“You have to comply with it and then do whatever you can to minimize the tax,” said Dan Lynn, a tax partner at Beene Garter LLP in Grand Rapids who chairs the firm’s medical manufacturers group.

To start, device manufacturers need to assure their information technology systems have been modified to track the sale of products subject to the tax, Lynn said. They should also examine any potential tax credits available at the state and federal levels that “may provide significant tax benefits to mitigate this tax burden” and look at what products may qualify for an exemption from the Internal Revenue Service.

If a device is produced in the U.S. for sale overseas, it’s exempt from the tax, he said. The same goes for components that are produced and sold to another manufacturer for further manufacturing.

Complicating the entire issue is that the IRS, as of last week, has yet to issue guidance on how it will administer the tax, Lynn said.

“People are operating on very little guidance. They are operating with half the information,” he said.

The medical device tax is part of the federal Affordable Care Act enacted in 2010 and is intended to generate revenue to pay for elements in the health reform law. Estimates for the revenue it will raise started at $40 billion, were later lowered to $20 billion, and now sit at about $30 billion.

The device industry has universally opposed and criticized the tax as a costly burden that will harm innovation. Kalamazoo-based Stryker Corp. estimates that the tax will result in a $100 million tax hit in 2013 alone.

One of the problems with the tax, critics say, is that it applies to the sale of a device, and manufacturers must pay it regardless of whether they are even profitable. That makes the net effect of the tax even much higher than 2.3 percent, said Dan Peterson, vice president of industry and government affairs at Bloomington, Ind.-based device manufacturer Cook Medical.

Small device manufacturers will probably feel the effect of the tax the most, since they have the least ability to absorb the hit, Peterson said.

Speaking at a panel discussion held during the recent MichBio Expo in Lansing, Peterson estimated that 80 percent of medical device makers in America employ 100 people or less.

“These small companies are the lifeblood of innovation in the industry,” he said.

In some instances, the tax will make the difference in whether a company is profitable, or perhaps worse for small and young companies that are working toward profitability, Peterson said.

“It really can hit these small companies very, very hard,” he said. “It could just take them from viable to non-viable pretty quickly.”

Device makers also have limited ability to pass along the cost of the tax to customers.

Manufacturers sell their products to hospitals, which are paid a set amount by health insurers and Medicare and Medicaid for the procedures where devices are used. Since the hospitals are unable to pass along the higher costs, they are unlikely to pay more to device makers, Peterson said.

One rationale behind the device tax is that the millions of people who will receive health coverage under the Affordable Care Act will drive up patient volumes, generating a corresponding rise in the sale of medical devices that will offset the increased tax burden for manufacturers.

Peterson calls that assertion a misconception. In Massachusetts, where universal health coverage was instituted in 2006, data shows a “virtually zero impact” on the sale of medical devices.

“It was no difference before or after for a number of years,” he said in the MichBio panel discussion.

Device makers have hoped since the passage of the Affordable Care Act that Congress would repeal the excise tax. The Republican-controlled U.S. House did so last June on a 270-146 vote that included the support of 37 Democrats.

The U.S. Senate has never taken up the bill and now with the results of the presidential election, most people don’t give repeal “a chance in hell,” Peterson said.

That leaves the industry hoping that lawmakers will delay the tax’s implementation, either yet this year in the lame-duck session or in early 2013 when a new Congress takes office, said Carrie Hartgen, vice president of state government relations and regional affairs at the Washington, D.C.-based Advanced Medical Technology Association, also known as AvaMed.

At a time of slow economic growth, the trade association advocates on the issue from a position of economic and jobs impact, said Hartgen, who spoke on the same panel discussion at MichBio as Peterson. Estimates peg the potential job loss from the tax at 43,000 nationally in an industry in which the U.S. still leads globally, she said.

Concerns are also rising that large device makers will move production and research and development to overseas operations, Hartgen said.

“This isn’t about ‘Obamacare.’ This is about jobs and our leadership position,” she said. “It’s at risk right now.”

Medical device and equipment manufacturing — an area that’s been a focus of economic development efforts in West Michigan — has been a bright spot in Michigan’s life sciences industry. The sector grew a solid 8.1 percent statewide from 2007 to 2010 to employ 10,328 people who earn an average annual salary of $63,629, according to an annual report issued earlier this year by the national biotech trade association BIO.

A large barrier toward any delay in the tax’s implementation is where it falls on the agenda in Washington, D.C., Beene Garter’s Lynn said. He wonders whether the medical device tax will get lost in the far larger political debate over what to do about the fiscal cliff and the $600-plus billion in automatic spending cuts and tax increases that take effect Jan. 1, and the potential impact on the U.S. economy.

“I don’t know where this tax fits on the list of priorities,” he said. “I suspect that right now it’s not a top priority.”

Read 6417 times Last modified on Tuesday, 27 November 2012 12:33

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