Medical-device tax stings, industry says

Sunday, January 13, 2013

— Some in the medical-device industry are worried that promising companies are likely to move offshore or reduce their operations to weather a 2.3 percent excise tax that took effect Jan. 1.

The tax is part of the Patient Protection and Affordable Care Act. The White House has said the medical device industry, like other health-care businesses, will benefit from an additional 30 million potential consumers who will gain health coverage under the law starting in 2014.

The first installment on the tax is due in late January for firms that owe more than $2,500 in quarterly taxes, the Internal Revenue Service says.

The tax applies to any medical devices regulated by the U.S. Food and Drug Administration, including braces, scanning devices - anything not available through retail, according to Brendan Benner, vice president of governmental affairs for the Medical Device Manufacturers Association in Washington, D.C.

John Ray, executive director of the Florida Medical Manufacturers Consortium, called the tax “incredibly punitive,” saying that, “It targets one of the most successful sectors in our country.”

The tax would amount to $230 on the sale of a $10,000 medical device. While that may seem small, opponents say it has a larger impact because it is a tax on sales - not profits.

“The biggest issue for medical-device industry is the excise tax - 2.3 percent tax on sales, not on net income - to companies like Mako,” said Dr. Maurice Ferre, founder and chief executive of Mako Surgical, a Davie, Fla., maker of surgical systems used for knee and hip replacement procedures.

The company added a second production line in 2011, but Ferre said the tax will inhibit the ability of medical-device companies to do research and development and create jobs. Mako had 400 employees in 2011 and was on track to hire another 90 in 2012.

Jeffrey Binder, chief executive officer of Biomet, which employs 400 at its Biomet 3i dental implant company in Palm Beach Gardens, Fla., blogged about the tax issue as early as 2009, when Congress was weighing health-care reform, writing, “The tax would create the worst of all possible situations: escalating costs on the newest technology and reduced capital to invest in jobs and R&D.”

In a statement released last week, Biomet said it continues to work for a repeal of the tax because it is “ill-conceived and counterproductive.” The tax “will require medical-device companies to evaluate all their discretionary spending, including R&D and hiring,” the company said.

While the tax was intended to help cover the cost of providing coverage to the uninsured, Ray said those new customers for health care will be primarily young - not patients in need of knee and hip replacement devices.

There was hope among some in the industry that a repeal would be part of the year end “fiscal cliff” negotiations, which averted a series of tax increases and spending cuts.

The Florida Medical Manufacturers Consortium sent letters to Florida’s U.S. senators, Marco Rubio and Bill Nelson, urging them to take action. The medical-device tax, the consortium wrote, will consume “65 percent of a typical company’s profits.”

Allen Craig, a board member of the consortium, said he expects larger companies will seek lower costs offshore, operating perhaps in Costa Rica or Europe.

“Big companies have flexibility. They’ll try and save as much as they can,” he said.

Craig, Florida sales manager for Interplex Sunbelt, a medical-device component manufacturer with 95 employees in Tamarac, Fla., said his company has international operations and expects an uptick in business as result of some businesses moving offshore.

But Craig still would like to see the tax repealed, saying it effectively equates to an income tax increase for medical-device firms, on top of their corporate tax rate. Some medical-device firms could end up paying 54 percent to 60 percent of their income in taxes, he said.

As a result, “you’re going to see investment dollars move out of the country,” he said.

Business, Pages 63 on 01/13/2013