Medical device tax survives fight to kill it

  • Article by: JIM SPENCER , Star Tribune
  • Updated: January 13, 2013 - 9:40 PM

The health care act provision took effect Jan. 1 over industry protests.

WASHINGTON - The medical device industry says its fight to kill a new tax on its products is not over, but public policy experts say chances of winning an outright repeal have all but disappeared.

Hundreds of companies in Minnesota's medical technology sector became responsible for paying the tax on sales of certain devices Jan. 1 after efforts to delay it as part of the federal fiscal cliff deal failed. First deposits of the 2.3 percent levy are due on Jan. 29.

"The odds are close to zero" that the industry can get rid of the tax completely now that it is in place, predicted Don Kettl, dean of the University of Maryland School of Public Policy.

"Under normal circumstances, it's harder to stop a tax once it's enacted," Kettl said. "You have to reverse the whole legislative process."

Industry lobbyists claim that the tax will cost medical technology businesses $667 million to implement nationwide and lead to layoffs or reduced hiring. They dispute tax supporters' rationale that the new health care law will insure more people and increase device makers' business, offsetting much of the tax.

Little Canada-based St. Jude Medical has estimated the cost of the device tax at $50 million to $60 million in 2013. The company has laid off 800 employees since August, and a spokeswoman said that "the medical device tax was one of many factors that contributed to the rationale for the realignment of our business."

Fridley-based med-tech giant Medtronic estimates that the new tax will cost the company $125 million to $175 million annually, a spokeswoman said. Medtronic set aside an initial $50 million for the arrival of the tax.

"This does take budget away from other investments we could make with that funding," spokeswoman Cindy Resman said. "But the reality is we have accounted for the impact in our planning."

Delegation opposed tax

Implementation of the tax marks a setback for Minnesota's congressional delegation. Republican Rep. Erik Paulsen sponsored a bill to kill the tax; it passed the House but never came up in the Senate. Paulsen, who voted against the fiscal cliff deal partly because it did not postpone the device tax, was unavailable for comment.

Minnesota's Democratic Sens. Amy Klobuchar and Al Franken worked with a bipartisan group that asked Senate leaders to delay device tax implementation as part of the fiscal cliff deal.

In an interview Klobuchar said House Republicans' refusal to support a fiscal cliff bill offered by Speaker John Boehner doomed negotiations for a bigger financial deal that could have included delaying the device tax.

Franken said delaying the tax was never "really an easy lift."

"It just didn't happen," he said in an interview. "It wasn't for lack of effort. ... We brought it up to [Senate Majority Leader] Harry [Reid] all the time. But as you know, Harry kind of got dealt out of the [fiscal cliff] deal."

Franken conceded that tax opponents need to "change our approach."

"You'd be naive to say [implementation of the tax] doesn't make it harder [to repeal]," Franken said. "But I want to meet with folks from the industry here in the state and talk about different ways of ... providing evidence that this [tax] might be counterproductive."

Big lobbying effort

The device industry has spent millions of dollars lobbying against the tax. Klobuchar and Franken both worked to cut it in half before they voted for it as part of the larger health care bill.

Both senators said they voted for comprehensive health care reform because its overall goals outweighed their opposition to the tax. "If you never vote for anything unless you think the bill is perfect," Franken said, "you're not going to vote for many bills."

Despite implementation of the device tax, the Advanced Medical Technology Association (AdvaMed), a trade association leading the lobbying effort, is pleased with the efforts of Klobuchar, Franken and Paulsen. "They really went to the mat on this issue," said AdvaMed's chief lobbyist, J.C. Scott.

AdvaMed also clings to hope of killing the device tax as part of comprehensive tax reform that is supposed to take place under the umbrella of deficit negotiations later this year.

That's an extremely optimistic goal, according to Norman Ornstein, a congressional expert with the American Enterprise Institute. Even with comprehensive tax reform to address the deficit, Ornstein said, the goal is to add revenue to the federal budget, not take it away.

No one has yet offered an alternative source of revenue that the House and Senate can agree to. Paulsen's bill paid for the device tax elimination by changing the way the government collected subsidies for health insurance premiums included in the health reform bill, something Klobuchar supported but Franken opposed.

In any case, the University of Maryland's Kettl said, the White House and most Democrats "are trying to build a deep moat around anything having to do with funding health care reform," which President Obama considers the landmark legislation of his first term.

The best way for the device industry to make its case now, Ornstein said, is to prove that its dire predictions of layoffs and shuttered businesses are actually playing out.

"There's little question that big players can deal with this and continue to thrive," he said. But if small med tech companies "struggle and fail," the leverage for reform might exist.

Gauging the effects

At small, early stage med tech companies such as Sunshine Heart in Eden Prairie, the device tax has put hiring on hold. Sunshine Heart officials must determine exactly how, or if, the new levy will affect cash flow.

A support system the company makes for people with chronic heart failure is not yet for sale in the United States. But a clinical trial in this country might produce taxable revenue, chief executive Dave Rosa said.

"That would have a serious impact on us," he said. "We're not cash flow positive yet. Smaller companies are more susceptible [to the tax]. You might be out of business."

On the other hand, Ornstein warned that federal regulators will be on guard against industry manipulation "to make this look awful."

"That," Ornstein said, "is the same as health insurance companies jacking up premiums just before the health reform law takes effect."

Jim Spencer • 202-383-6123

  • "Under normal circumstances, it's harder to stop a tax once it's enacted," Kettl said. "You have to reverse the whole legislative process."
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