Health law tax worries firms

Device makers expect job cuts

— With 30 million more Americans expected to get health insurance under the Patient Protection and Affordable Care Act, the law is seen as a windfall for the health industry.

To help pay for the health-care overhaul, which was enacted in 2010 and withstood a Supreme Court test this year, the legislation will impose a 2.3 percent excise tax on the manufacture of medical devices starting in January.

The sheer number of new enrollees in health plans will increase demand for the devices and more than offset the tax for the manufacturers. Or so the theory goes.

Device makers say no. Some are planning for substantial jobs cuts and foresee a chilling effect on research and development.

The industry is fighting back. It asserted itself and the House of Representatives voted down the tax by 270-146, with 37 Democrats joining the Republican majority. But the Senate, which could take up the measure after the presidential election Nov. 6, has a Democratic majority and has been unwilling to pass any legislation to unravel the health care act.

The Medical Device Manufacturers Association says up to 500,000 workers are directly employed in that industry and 1.5 million indirectly.

There are about 10,000 medical device industry employees in Arkansas, according to Brendan Benner, vice president for public affairs for the Washington, D.C.-based association.

Eighty percent of the association’s 300 member companies have fewer than 50 employees, and 90 percent have fewer than 500, Benner said.

The Small Business Administration defines small businesses as having fewer than 500 workers. The agency says they create about two-thirds of all new jobs. The industry is one of the few “net-trade” exporters, meaning it ships more goods out of the country than it imports, Benner said

“The cost of health care must be addressed, but the idea is not to punish the industry that is part of the solution,” Benner said.

Stryker Corp. of Kalamazoo, Mich. announced nearly a year ago that it expects to shed about 1,000 jobs in anticipation of the new tax. The company last week said it has not changed its outlook. Stryker, which makes joint replacement devices among other products, employs 20,000 worldwide.

Deerfield, Ill.-based Baxter International Inc., which employs 875 in Arkansas and about 48,500 globally, has seen a slight downturn in business thanks to universal health coverage, spokesman Deborah Spak said.

“We do not anticipate financially material upside in the future as access [to health insurance] expands, given the nature of our products, since many critically ill patients, whether insured or not, are already receiving our products as part of hospital care they receive,” she said. Baxter’s sales growth in 2010 dropped 0.5 percentage points, or more than $60 million, she said. Baxter had $13.9 billion in sales in 2011, she said.

Bryan P. Schmutz of Roger Williams University in Bristol, R.I., and Rexford E. Santerre of the University of Connecticut say that, in general, the act will increase demand for medical devices since more people will have health insurance.

However, the researchers note in their paper, published this year, that the Patient Protection law will cut Medicare payments to providers who buy the devices. They, in turn, will postpone purchases or pressure manufacturers to cut prices, Schmutz and Santerre say. The researchers warn of the possibility of “cheapest is best” approach to health care.

The University of Arkansas for Medical Sciences’ BioVentures program has about 20 start-up companies that stand to feel the effects of the tax indirectly, said Mike Douglas, director of the program.

Some of the companies, which seek to commercialize UAMS intellectual property, use “medical testing equipment that is quite expensive. Certainly, that excise tax would impact their ability to provide that instrumentation,” Douglas said.

Physicians Laboratories of America and Myeloma Health have spent $2 million to $3 million each on the instruments.

“There’s not really much of a choice other than to pay that additional tax,” Douglas said.

Little Rock-based Snell Prosthetic and Orthotic Laboratory hopes to dodge the bullet, said Chief Executive Rick Fleetwood. The law is not clear that custom prosthetics and orthotics are considered taxable “durable medical equipment,” such as wheelchairs and off-the-shelf braces.

“We’re not sure if we’re going to be affected by [the law],” Fleetwood said. “We’re arguing it before Congress right now.” Snell employs about 60 people in nine cities and has been in business for 101 years, Fleetwood said.

Don DeBolt, chief operating officer for the American Orthotic and Prosthetic Association, said that Tom Fise, the association’s chief executive, was able to successfully argue that custom orthotics and prosthetics qualify under the provision in the law that exempts eye glasses, contact lenses and hearing aids.

“That exemption for [orthotics and prosthetics] was specifically included in the proposed regulations. Now what we’re all holding our breath for is that the final regulations come out with that exemption. Obviously [the tax] could be very harmful to patients because something like that has to be passed through,” DeBolt said.

“We fully supported [the] repeal of the medical tax across the board.”

Business, Pages 72 on 09/30/2012

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