Tax and Death—The 2.3% US Device Tax

Tax and death have been said to be the only certainties in life for hundreds of years. The most famous quote about this was made by Benjamin Franklin, one of the founding “fathers” of the USA, in 1789, and later requoted by US author Mark Twain. Earlier utterers include Edward Ward, an English humourist in 1724 and playwright Christopher Bullock, also English, who wrote in 1716 “‘Tis impossible to be sure of anything but death and taxes”.

On January 1, 2013, the US government enforced a new excise tax on sales of medical devices. The tax is charged at 2.3% of the sales price of all devices sold in the USA. Estimates point to a tax gain of US$2.5 bn in 2013 alone. It is part of the US Patient Protection and Affordable Care Act—aka the Obamacare healthcare reform or the Affordable Care Act—brought into US law in March 2010.

Unsurprisingly, responses from manufacturers have been that of objection. Advamed, the USA’s largest medical device manufacturing trade association, is campaigning hard to persuade congress to repeal the tax. The organisation’s CEO said in February: “The device tax is already having a toxic effect on innovation, jobs and US leadership of the medical technology industry.”

Addressing the Medical Devices LinkedIn group—an online network with 161,000 members—Republican Congressman Erik Paulsen pointed out that the tax antagonises government’s focus on manufacturing growth. He is also lobbying for a repeal. He also believes that America’s global leadership in medical technology is threatened by this tax, stating: “While other countries, especially in Asia and Europe, are providing tax incentives for medtech to research, invest, and manufacture, US policy makers are driving American innovators overseas.” Paulsen will be addressing the industry at he group's 10x Conference in Minnesota on April 29-30, 2013.

Having known about the tax since March 2010, most medical device conglomerates made allocation for it in their financial plans for this year. In fact, a source told me that one of the world’s biggest manufacturers had overestimated the tax to such an extent that it, in effect, enjoyed a windfall this year. I asked twenty of the world’s largest OEMs to comment. Most of them referred me to Advamed, saying they supported the repeal.

Baxter pointed out that the Affordable Care Act was having an effect on the company in areas outside medical devices. A spokeperson told me: “We have estimated that the device tax will have about a US$30 mn impact on our 2013 financial results. Devices represent only a portion of our portfolio—many of our products are considered pharmaceuticals and biologic and biotech therapies. The most significant impacts of the Affordable Care Act, of which the device tax is just one piece, on Baxter over the last few years have been pharmaceutical industry fees, increased rebates to state Medicaid programmes for some of the company's drugs and biologics, and expansion of the 340B drug discount programme, all of which have been previously implemented.”

Stryker, also supporting the repeal, said: “Stryker expects to owe approximately US$100 mn in the first year alone, equating to over 20% of our annual global R&D investments. We would rather put this money towards jobs, innovation, clinical research and other priorities which will create value-added medical technology for patients while helping us partner with hospitals to deliver cost effective solutions.”

In Europe, the effects are already being felt. Fritz Stein, head of medical at Swiss finished plastic device outsourcer Weidmann, explained that customers have been trying to pass the tax upstream by asking for lower prices for Weidmann’s services. In late February 2012 he said: “While our revenues have not been directly affected, discussions with customers about prices are increasing. But the nature of manufacturing for healthcare is that there will always be pressure on prices, and we absorb this through operational excellence.”

While a political war ensues in the White House and US industry, we must bear in mind that at the heart of the work being done is an extension of the reach of healthcare to Amerca’s poor. Obama’s goal is to help them get affordable access to healthcare through taxation, while industry wants to provide value-added healthcare through capital investment, clinical research economic growth and the creation of jobs.

By Sam Anson.

The press release from AdvaMed and the statement from Congressman Paulsen are published below.

AdvaMed "Doubles Down" on Device Tax Repeal

The leadership of the Advanced Medical Technology Association (AdvaMed) today unveiled the association’s 2013 agenda, effectively doubling down on the need to repeal the damaging $30 billion medical device excise tax and to prevent further cuts to Medicare that would harm patient access to life-changing, life-enhancing medical technology.

“The device tax is already having a toxic effect on innovation, jobs and U.S. leadership of the medical technology industry. We are very pleased the repeal effort is gaining strong bipartisan support in both the House and Senate,” said Stephen J. Ubl, president and CEO of AdvaMed.

“This issue is critically important to companies large and small that already are living with the real-world harmful impact this tax is having – including layoffs, cuts in R&D and delayed expansion plans. While we understand and support action to address the deficit, the negative impact of the tax is compounded exponentially by the repeated cuts to the industry and the customers it serves,” said Ubl.

“Recent policy changes have already put a heavy burden on large sectors of our industry – including successive Medicare cuts impacting diagnostic lab tests, imaging, durable medical equipment and diabetes test strips – on top of hospital cuts which have also had an adverse impact on our industry,” said Ubl.

Device manufacturers are now required to pay an estimated average of $194 million per month in medical device tax payments – money that could be going toward investment in R&D for the next generation of medical innovations and spurring American job growth.

Advancements in medical technology are driving more efficient and cost-effective care. For example, hospital stays dropped by more than 50 percent between 1980 and 2000. Meanwhile, spending on medical technology accounts for only six percent of national health expenditures, a figure that has remained constant over the past two decades.

“We can’t be penny-wise and pound-foolish with short-sighted Medicare cuts that will have a long-term negative impact on innovation and our industry. Chronic disease imposes a crushing cost on patients and health care systems, and our industry’s innovative, life-saving technologies can provide real solutions to these challenges,” Ubl said.

As the 113th Congress works to address the federal budget and reform the tax system to make it fairer and more competitive, AdvaMed’s top priorities include working to ensure that Congress considers the impact of all proposed policies on the medical technology industry and the patients it serves.

As part of this effort, AdvaMed stands with FDA on the need to prevent limitations on the agency’s ability to access 100 percent of the user fees it collects, which could reduce FDA’s ability to provide timely reviews and approvals of new products.

With the March 1 implementation of sequestration, the 2013 impact will amount to an across-the-board cut of between 5.1 to 5.3 percent in federal funding that applies both to FDA’s appropriated budget, as well as industry user fees. The current federal budget continuing resolution, unless corrected, also limits FDA’s ability to access user fees.

“The fees voluntarily paid by industry are not taxpayer dollars, and should not be considered in the same light as appropriated funding,” said AdvaMed Chairman David C. Dvorak, president and CEO of Zimmer. “FDA should have full access to fees paid by the industry, and the agency should be properly funded to meet its commitments under the new user fee agreement.”

In addition to shaping policy at home, AdvaMed’s top priorities include increasing its international presence in key markets such as China, Brazil and India to address the growing regulatory, payment and advocacy needs of its members, and to meet the demand of governments and patients around the world seeking advanced medical technologies to solve their health care challenges.

“These nations are experiencing rapid economic growth, and their burgeoning middle-class populations are demanding the best treatments that modern health care can deliver,” said Dvorak. “It is crucial that AdvaMed members have the opportunity to fairly compete in these markets.”

Paulsen:

In his State of the Union address President Obama stated his support for making the United States a magnet for domestic manufacturing jobs. He signaled his support in the first presidential debate when he said, “We have to invest in advanced manufacturing. We've got to make sure we've got the best science and research in the world."

I agree with the President: We need to invest in manufacturing, research, and development. And, it is my sincere hope he will work with members of Congress on both sides of the aisle to institute policies to spur innovation, increase job creation, and keep manufacturing jobs here in America.

A key sector where America’s global leadership is threatened is the medical technology industry. While other countries, especially in Asia and Europe, are providing tax incentives for medtech to research, invest, and manufacture, U.S. policy makers are driving American innovators overseas.

Unfortunately, some policies are causing dramatic jobs losses in medical innovation.

News headlines highlight thousands of eliminated jobs from this dynamic industry. These layoffs prove some device companies are no longer investing and innovating here in America. Instead, they’re cutting operations, scaling back, and in some cases, sending those jobs overseas.

The question must now be asked: What is driving these jobs away?

The answer is a new $30 billion tax on medical devices in the president’s new health care law. It’s a 2.3 percent tax on revenue, not profit, and equates to a $30 billion burden being placed on the backs of medtech companies around the country.

A November Ernst & Young study showed the new excise tax adds 29 percent per year in taxes to the amount the medical device industry already pays in federal income tax. Estimates from Congress’ bipartisan Joint Committee on Taxation already show medtech will pay $8.7 billion in overall federal income taxes this year, with the device tax adding another $2.5 billion.

The tax took effect in January and the medical device industry now faces one of the highest effective tax rates of any industry in the world.

American manufacturers need a government that will partner with them to bring jobs back home and jump start our economy, not a government that builds barriers and prevents growth.

I know that medical device innovation and high-tech manufacturing is important to our economic future, and that’s why I’m working across the aisle to stop this onerous tax. Last Congress, the House passed legislation to repeal the tax – but the bill died in the Senate. In the new Congress I have already introduced legislation to repeal the tax again and have gained 187 co-sponsors.

We have the support in the House, but in order to see this bill put into law, the Senate must also act. We need your help in making this legislation a reality.