Battle over medical device tax heats up

WASHINGTON - LifeScience Alley CEO Dale Wahlstrom flew from Minnesota to the capital recently and landed gingerly on the edge of the nation's fiscal cliff.

Wahlstrom, whose trade group represents tens of thousands of Minnesotans who work in the state's critical medical technology sector, arrived with a request that would blow a $28 billion hole in the country's revenue stream over the next decade.

He wants Congress to kill a tax on medical devices that is supposed to help pay for Obamacare.

The battle over the device tax is not new. The industry has already succeeded in getting it chopped in half since its passage in 2010 as part of the Affordable Care Act.

Now the goal is to repeal the rest. But that has become tricky, with Congress focused on finding a budget deal to avoid automatic, economically crippling budget cuts and tax increases.

In that environment, ending an existing funding mechanism for the president's signature legislation is not an easy sell.

"The timing is awful for [the medical device industry]," said Norm Ornstein of the American Enterprise Institute. The House and Senate are "going to be looking for more revenue, not less."

Members of Congress received Wahlstrom and dozens of other CEOs from across the country politely, but made no promises.

"There were no commitments made on one side or the other, but there is a definite understanding of the issue and the unintended [negative] consequences" of the device tax, Wahlstrom said.

He visited half a dozen legislators with a delegation of other Minnesota businesspeople, whom he declined to name.

The group spoke to Democratic Sens. Amy Klobuchar and Al Franken of Minnesota, both of whom oppose the tax, as well as Minnesota Republican Rep. Erik Paulsen, who authored a bill to eliminate the medical-device tax that passed the House but has not been acted on by the Senate.

Paulsen, whose bill received strong bipartisan support, wants to get the device-tax repeal included in the fiscal-cliff negotiations.

"I've been trying to jump-start the conversation in the midst of fiscal-cliff issues to have this issue in the mix because it is so connected to the economy and jobs and bringing in revenue, which we all want," he said in an interview.

In a statement, Franken proposed delaying implementation of the tax, which is set to kick in Jan. 1, "so that the medical device industry isn't hurt while we find a permanent -- and fiscally responsible -- solution."

Klobuchar's communications director, Linden Zakula, said the senator "is working to keep the tax from going into effect."

Meanwhile, Rep. Keith Ellison, a Minneapolis Democrat who co-chairs the House Progressive Caucus, thinks the tax "harms the industry and its employees."

A difficult fight

But at this point, Ornstein predicted, killing the tax will not be easy.

The tax's supporters say the health care law will create an expanded market for medical devices that will help device makers offset the cost of the new tax.

Also, Congress has already compromised by cutting the device tax in half since its passage. Asking to shift the entire revenue burden to somebody else makes the medical-device industry "really look like a special interest saying, 'Do this to everyone else, but not to us,'" said Ornstein, an expert in congressional matters.

Finding an alternative source of revenue in the face of a spiraling national debt makes repealing the device tax more difficult, Wahlstrom was told by some legislators.

"We talked a lot about how the offset would be determined," he said. No consensus exists.

Still, the med-tech industry is stepping up an already aggressive attack on the levy.

The Advanced Medical Technology Association (AdvaMed), the industry's national trade group, sponsored a recent fly-in of more than 50 CEOs who combed Capitol Hill.

In conjunction with the visits, AdvaMed released a study that claimed the new device levy would increase the industry's federal tax bill by 29 percent.

It was part of an intensified lobbying effort by AdvaMed, the Medical Device Manufacturers Association and the Medical Imaging & Technology Alliance to dump the device tax.

"Our objective is to push this issue this year," LifeScience Alley's vice president for government relations, Shay Mandle, said. "Growing the economy is just as much of an issue [as budget cuts and new revenue]."

The jobs argument is one that hundreds of trades groups and companies, including LifeScience Alley, Boston Scientific and 3M Healthcare, made in a Nov. 13 letter to Senate Majority Leader Harry Reid, D-Nev.; Senate Minority Leader Mitch McConnell, R-Ky.; Speaker of the House John Boehner, R-Ohio; and House Minority Leader Nancy Pelosi, D-Calif.

"The industry employs more than 400,000 workers nationwide, generates approximately $25 billion in payroll, pays out salaries that are 40 percent more than the national average ($58,000 vs. $42,000), and invests nearly $10 billion in research and development annually," the letter said.

A huge, unfair tax hike?

Industry leaders also complain that health care reform will not materially increase the market for devices and that the Internal Revenue Service has not yet finalized rules for computing and implementing the new tax.

Because the tax is based on revenue and not profits, industry officials maintain that the law, as written, could amount to a huge, unfair tax hike.

"It brings the effective [federal] tax rate for some of our members to over 50 percent," Wahlstrom said.

Whether this can compel congressional action by year's end in the midst of so much other economic angst is by no means certain. At this point, even industry representatives have started to dial back expectations.

"I feel confident there are going to be changes," said LifeScience Alley's Mandle. "Whether there is a full repeal is another question."

Jim Spencer • 202-383-6123