Voices of Frustration, Uncertainty in Medtech Election Perspective (Part II)

The Device Tax

One provision of the Obama administration’s healthcare reform law has led to one of the most heated debates in the medical device industry. The 2.3% medical device excise tax is scheduled to go into effect next year, and many medical device companies are already taking action in anticipation of the fallout. Stakeholders such as the Medical Device Manufacturers Association (MDMA) and AdvaMed are fighting to repeal the tax, because they believe it will take away from device companies’ bottom lines and thus inhibit the hiring of additional talent or investment in new product development. Many question why the medical device industry has become a target for this kind of revenue raising by government. The tax is expected to raise $20 billion over 10 years.

“Although everyone is accepting the fact that it’s fait accompli and are implementing long-term plans to deal with it, they don’t want it to be implemented and not be ready to cover it with their operating costs, says Len Czuba, president of Czuba Enterprises Inc (Lombard, IL). “Everyone, as I have noticed, is controlling spending, hiring, investment in new facilities and new products and new equipment; it just puts a huge damper on the industry.” The uncertainty related to how the device tax, once implemented, truly will affect companies is also putting a damper on those that want to move forward. Device companies, including Stryker, have already blamed the impending tax for forcing them to lay off hundreds of workers.

“You can’t continue to have amplified regulation, amplified taxation, a compression of reimbursement threshold from CMS, amplified corporate taxes, and amplified ordinary income taxes, and expect us to continue to have an environment that lends itself well to innovation and job creation,” Buck says. “I don’t buy the argument that the United States government creates jobs; I think entrepreneurs and people create jobs. I also believe that the United States government can do things that can affect whether jobs are easy to create or hard to create.” 

NuVasive’s executives are vehemently opposed to the device tax and recently welcomed Mitt Romney to speak out against the tax and other issues during a visit to the company in San Diego. During Romney’s introduction, Alex Lukianov, chairman and CEO of NuVasive, emphasized the challenges faced by the company over the past few years and the curtailment of its ability to innovate due to regulatory burdens. This restriction has prevented the company from hiring as many as 150 people, Lukianov said. “With the medical device tax looming, potentially another 200 jobs would be lost in 2013,” he said at the event. “We need to do everything that we can to push back on these issues, to push back on Obamacare, to repeal it.”

In his speech at NuVasive Romney related to the audience by criticizing the long and arduous FDA process and said that while many devices are developed domestically, they are available in Europe much earlier. He called the burdensome regulation and impending device tax an attack on America.

“This is not just about the business itself being attacked—bad enough as that is—and the employees who work there being attacked—bad enough as that is— but the entire economy, all of America, slows down, and the proof is what you’re seeing in the current recovery,” Romney said. “The taxation burden and the regulatory burden that the president’s people have put in place has slowed down the recovery and made this the most tepid recovery from a recession that we’ve seen since Hoover.”

Romney emphasized that the device tax will not only hurt large companies, but it will also severely inhibit the growth of start-up firms. “Two-thirds of the venture capital that goes into healthcare, in the world, goes into the United States. This is one of the areas where we lead the world, and if we burden this industry by saying there is going to be a tax, even on unprofitable medical device companies—you’re taxed on your sales, not your profit—if you’re a new business starting off, unprofitable every year as you’re trying to grow... What venture capitalist is going to want to invest in an American startup as opposed to a foreign startup?”

Although predictions vary on what affect the election will have on the device tax, substantial changes in the White House or on Capitol Hill could create a bigger opening to repeal the device tax.

However, not everyone in the industry thinks the tax is as great of a concern as the state of FDA. “I would rather see more rationalized decision making at the FDA level than worry about the tax,” Adam Elsesser, CEO of Penumbra (Alameda, CA), said in a recent MD+DI article. In addition, he doesn’t believe that venture capitalists are basing their decisions on the tax.

“Companies need to develop a strategy that makes sense as they look at globalization of the product and the workforce,” says Jim Prutow, PRTM director in the Health Care Group at PricewaterhouseCoopers. “The device tax is one element in thinking through that strategy, but I don’t see where companies are going ahead and driving their decision making solely based on the tax. I think there’s a bit of a wait-and-see attitude about what is going to happen with this device tax.”
 

 Maria Fontanazza is managing editor of MD+DI. Follow her on Twitter @MariaFontanazza.