The drumbeat of criticism among local medical-device makers continues in advance of a new tax on industry sales.
Domestic medical-device manufacturers and importers next year will be subject to a 2.3% tax on their domestic revenue. The levy is part of U.S. healthcare reforms passed in 2010, and is billed as a way to raise $20 billion to help cover the nation’s uninsured.
Medtronic Inc., which has about 700 workers in Orange County, estimates it could pay $125 million to $175 million annually of device taxes starting in 2013.
The device tax is “one of the costs we’re going to have to cover, as we put together our plans for fiscal year 2013 and as we put together our initiatives on a long-term basis,” Gary Ellis, Medtronic’s chief financial officer, told analysts in a February earnings call.
AdvaMed—a Washington, D.C.-based trade group whose last two board chairmen were local device makers—claims the tax will stanch innovation and send jobs overseas.
Local Leaders
The group’s efforts heated up under the leadership of Michael Mussallem, chief executive of Edwards Lifesciences Corp., an Irvine-based maker of cardiovascular devices. During the subsequent tenure of James Mazzo, president of Santa Ana eye device maker Abbott Medical Optics Inc., AdvaMed continued its efforts to repeal the device tax.
AdvaMed in July sent a letter urging congressional leaders to take “timely action” on legislation introduced to repeal that tax. It also recently argued that the tax would trigger a loss $3 billion in industry investment that could cost the U.S. economy 39,000 jobs and $8 billion in economic activity.
The tax has also been criticized by the Medical Device Manufacturers Association, another Washington trade group.
“[The association] said from the beginning that the device tax would hamper job creation and patient care, and unfortunately we are already seeing this play out as companies plan for what is really a tax on innovation,” Mark Leahey, chief executive of the trade group, said recently. “Many companies … will be paying more in taxes than they earn in profits starting in 2013.”
Joe Kiani, chief executive of Irvine-based patient monitoring device maker Masimo Corp. is on the association’s board.
The Internal Revenue Service and Treasury Department in February issued details of which companies will or won’t be subject to the tax.
Some Exemptions
Regulators carved out exemptions for early-stage medical devices and also provided “a little clarity on fears of a double tax for contract manufacturers, importers and component manufacturers,” according to industry website MassDevice.
New York-based global accounting and audit firm KPMG LLP recently polled device makers’ financial executives last month and found that 40% of their companies were considering price hikes, cutting jobs or changing their manufacturing processes to compensate for the impact of the looming tax.
Bottom Lines
Some 61% of 190 medical device financial executives surveyed said the tax would hurt their companies’ bottom lines, while 60% said the tax will hike compliance costs.
A total 55% said they expect it will be difficult for their companies to comply with the tax, citing confusion over which devices will be taxable as one of the key issues.
KPMG tax partner Adam Uttley told Reuters that companies might find it tough to raise prices, due to increased spending restraint by hospitals.
Court Case
Some in the industry believe the tax could be voided, if the U.S. Supreme Court tosses all or part of the healthcare reforms when justices rule on the legislation in the next couple of months, he added.
“There’s a whole plethora of medical device companies that are hoping the device tax is going to go away and are postponing decisions until they see whether the tax is going to survive,” Uttley said.
