How CareFusion is Dealing with the Medical Device Tax

CareFusion’s fiscal year ended June 30, making it one of the first medtech companies to report full-year results for 2013. As such, its recent earnings call provided some insight as to how at least one device maker is coping with the medical device tax.

The industry has argued that the tax, which went into effect this past January, would force companies to reduce R&D, execute layoffs, outsource manufacturing to lower-cost locations, and pass the tax on to end users. A February 2012 survey conducted by Massachusetts-based industry group MassMEDIC indicated that 44% of companies planned to pass the tax onto hospitals, clinics, purchasing organizations, and doctors. Thirty-nine percent said they would absorb the cost themselves, with half of those saying they would make up the lost revenue by cutting R&D expenditures.

So what did CareFusion do?

“We continue to offset the increased expense from the medical device tax and acquisitions with disciplined expense management, particularly in our corporate functions,” James F. Hinrichs, the company’s chief financial officer, said in an August 8 earnings call.

He didn’t elaborate as to exactly what that means, but posts on Glassdoor.com, a site that allows employees to anonymously post reviews of their employers might provide some clues. In a post from July 2012—about six months before the tax took effect—one poster, who identified himself or herself as a current employee, alleged that Carefusion discontinued its 401(k) contribution for employees because of the tax. A number of posts from 2013 bemoan "constant layoffs" (see here, here, here, and here). A post from a current employee dated May 2013 complained, “Company keeps going through periods of restructuring and layoffs. Employee bonus is meager and there is no stock options or stock purchase program.”

One thing CareFusion doesn’t appear to be cutting back on as a result of the device tax is R&D. The company increased its R&D spending by $4 million in its fiscal fourth quarter, Hinrichs said in the call. For the 2013 fiscal year, CareFusion’s R&D spending rose 17%, and it doesn’t plan to cut back next year.

“We expect our fiscal '14 R&D expense to be in line with 2013 as we have maintained a steady spend rate for a number of quarters now,” Hinrichs said.

Of course, CareFusion only had to deal with the device tax for half of its 2013 fiscal year. The 2014 fiscal year will be the first the company feels the full weight of the tax. CareFusion's tax rate for 2013 was 28.5%, and it’s predicting a rate somewhere between 28% and 30% for 2014.

“Our operating expense line will increase in fiscal '14 as we have headwinds from a full year of medical device tax, as well as our incentive comp plans,” Hinrichs said.

CareFusion’s management has been an outspoken opponent of the medical device tax. CEO Kieran Gallahue last year sent an e-mail to the company’s U.S.-based employees urging them to sign an online petition urging Congress to repeal the tax, a provision of the Affordable Care Act that is predicted to raise more than $30 billion over the next decade.

In July, the trade group AdvaMed announced the device tax has raised $1 billion since its implementation, but there's evidence to show that interest in the tax is waning.

Update: Troy Kirkpatrick, director of public relations at Carefusion, contacted our sister site Qmed.com after it recapped this story. He said Carefusion "continues to match employee contributions up to certain percentages."

Kirkpatrick also addressed the layoffs mentioned by Glassdoor.com posters. He denied that any layoffs are attributable directly or only to the device tax. "We have strategies in place and simplification initiatives to focus our resources on growth opportunities," he wrote in an e-mail. "This has resulted in staff reductions in some areas and hiring in other areas. For example, we have reduced some positions in support functions, but added in R&D and customer facing position. The net impact has been that we have added jobs. We have not had drastic layoffs as the article implies. It is more a reallocation of our resources."

—Jamie Hartford, managing editor, MD+DI
[email protected]

[Photo Credit: iStockphoto.com user p51d ]