Tax could ensnare medical-device industry
When a 2.3% excise tax on all medical devices sold in the U.S. went into effect in 2013, Checkpoint Surgical was just getting started with its intra-operative nerve stimulators, used to locate and assess nerves during surgery.
For a company that was at the time not yet profitable and still dependent on investor revenue, the tax was significant, said Len Cosentino, president and CEO of the biomedical company in Cleveland. The cost of the tax was equivalent to hiring an additional employee that he estimates would have brought in another $300,000 to $400,000 of revenue.
Checkpoint Surgical and the medical device industry caught a break in 2016 and 2017 thanks to a bipartisan decision in 2015 to place a two-year moratorium on the tax, which was created to help pay for the Affordable Care Act. During that time, the company was able to get more investment dollars, hire more people, and spend money on sales and marketing.
Efforts to again halt the tax before it's set to go back into effect in January were tied to the ultimately unsuccessful efforts to repeal and replace the 2010 health law, also known as Obamacare. Still, after enjoying such broad bipartisan support in 2015, biomedical leaders say they're hopeful that Congress will put forward legislation to ensure the tax will not be in place come Jan. 1, 2018. Republican Sen. Rob Portman of Ohio, in particular, has been a vocal opponent of the tax.
Democratic Sen. Sherrod Brown of Ohio, on the other hand, has voted against repealing the tax in the past but also voted for the temporary moratorium. According to his office, Brown in the meantime has asked medical device companies for information about how the moratorium over the last two years has affected their businesses — whether they've been able to hire more workers, increase wages, maintain manufacturing jobs in the U.S. or lower consumer costs, for example.
"The last time this was on the floor of the Senate as a standalone measure, it garnered 79 Senate votes," said Greg Crist, spokesman for the Advanced Medical Technology Association (AdvaMed) in Washington, D.C. "If you put this bill on the floor tomorrow, in either chamber, it would pass overwhelmingly."
AdvaMed has been advocating for a full repeal of the tax rather than another suspension. Medical device companies operate not on annual cycles but on eight to 10 year innovation cycles from bench to bedside, Crist said.
According to the conservative-leaning, Washington,D.C.-based American Action Forum, the tax was expected to raise $8.1 billion in revenue between 2013 and 2015, but it raised only $5.9 billion. Moreover, the think tank suggests 28,000 jobs were lost nationally in the three years the tax was in effect. If reinstated, the group expects another cumulative loss of 25,000 jobs by 2021.
The disdain for the tax in the Cleveland area — an area whose economic resurgence is dependent, or at least buoyed, by a thriving medical device industry — is widespread. In 2010, A. Malachi Mixon III, then CEO of Elyria-based Invacare Corp., went as far to say the tax was the equivalent of "throwing a hand grenade in the middle of the health care economy." A few of the only exempt devices under the tax were contact lenses, eyeglasses and hearing aids.
As for the biomedical industry's economic impact regionally, BioEnterprise, a Cleveland-based nonprofit tasked with helping healthcare startups, reported the sector grew 59% between 2000 and 2016 to become a $5.6 billion industry. The organizations defines biomedical in three categories: medical devices, pharmaceutical and healthcare technology. As for medical devices, that category raised 45% of the capital funding in 2016 in the region, according to the report.
Crist, meanwhile, is optimistic the tax will not be in effect in January, either thanks to a full repeal of the tax, as preferred, or another suspension.
"We're working now on 2025, 2026, 2027 devices, and our companies need that certainty that comes with a full repeal," he said. "These short-term suspensions yield short-term benefits."
AdvaMed is launching ad campaigns in several states, including Ohio, to stress the importance of putting innovation first.
"Thousands of companies face a massive, billion-dollar tax increase in a matter of months," AdvaMed president and CEO Scott Whitaker said in a statement. "We know full repeal can make it across the finish line and become law, so it's time to do something about that when Congress returns."
Crist stressed that it's important to get this resolved quickly, because now is when CEOs are making financial decisions around paying the tax or investing in research and development, he said. Checkpoint Surgical would have to cancel plans to hire two new sales people if the tax remains on the books, Cosentino said.
"Suspension of the medical device tax is helpful, as it frees up money for other R&D and growth," Robert Schmidt, founder and chairman of Cleveland Medical Devices, said in AdvaMed literature.
John Schellenberg, vice president of customer programs and logistics for Quality Electrodynamics LLC would certainly like to see that happen. The nearly 12-year-old company, based in Mayfield Village, Ohio, makes coils for MRI machines and sells them to companies like Siemens, GE and Toshiba.
Understanding the tax and establishing a compliance program took a significant amount of time and effort for the company, he said. When the tax was in effect from 2013 to 2015, Quality Electrodynamics absorbed the cost rather than passing it onto its customers.
They were pleased to regain their margins in 2016 and 2017 with the reprieve from the tax. The suspension "gave us funds and resources available to pursue innovation, and expand our product offerings, and also as a result have more products, hire more people," he said.
Cosentino said he's "extremely disappointed" that Congress didn't accomplish a repeal of the tax and other things related to the repeal and revision efforts. But he's "absolutely" hopeful that the tax will be halted again.
"I would have thought it would have been done already," he said. "But I think (considering) the tremendous cost to jobs and to innovation — and because it's been done before even when you had the Obama administration in place — I've got to believe that they can at least get that done again."
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