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A 2.3-percent excise tax that will be imposed on the medical device industry beginning in 2013 will lead to a reduction in jobs and cuts in new technology development, a national trade association official said.
Some northeast Indiana medical device manufacturers are less specific about the impact, but most nevertheless dislike the tax and acknowledge it will lead to budget adjustments.
The tax, which is part of the new health care reform measure and is expected to generate $20 billion through 2019, is designed to help offset the costs of health care expansion expenses, said Thomas Novelli, director of federal affairs for the national Medical Device Manufacturers Association.
But he said the tax is unfair and punishes an industry that is critical to the well-being of Americans and the national economy.
“This is one of the few industries left that is creating jobs in this country,” said Novelli. “Yet essentially, at the end of the day, this will be a job killer. It’s counterintuitive. We tend to subsidize the industries that are failing and we’re taxing the industries that are doing well.”
The medical device industry is important to Indiana and in particular the northeast region, which is a major player in producing orthopedic devices.
There are about 300 medical device companies in Indiana employing 18,500 Hoosiers directly and another 44,500 in supporting roles, according to the Indiana Medical Device Manufacturers Council. The state, said the council, ranks second only to California in production and output associated with medical equipment and supplies.
Novelli said the 2.3-percent tax on medical device sales is deductible on corporate returns. Even so, he said, it will still cut into revenues, and that will hit small to midsize companies the hardest because they “have razor-thin profit margins.”
Smaller companies often are the leaders in innovation, Novelli said, and they also represent the bulk of the industry. Eighty percent of medical device companies, he said, employ 50 people or fewer.
“Under the current (tax) structure,” the national trade association said, “many (smaller) companies will owe more in taxes than they generate in profits, requiring companies to lay off employees, cut R&D budgets and slow the development of new therapies that will improve the quality of care for all Americans.”
Brian Emerick, president and CEO of Micropulse Inc. in Columbia City, said he hadn’t studied the health reform measure thoroughly, but believes it might impede investments in new equipment, result in job losses and cut research-and-development initiatives.
He said his 180-employee company is a contract manufacturer of instruments and implants for the orthopedic industry and the more likely impact on Micropulse will be diminished spending by his clients rather than any cuts enacted at Micropulse as a direct result of the tax.
“We live and die by the health of the entire industry,” he said, “so what happens at the top affects us.”
It is possible, one official said, that some companies may be so small that the effect of the tax will be minimal under any circumstance. At least that’s what Herb Schwartz, president of Fort Wayne’s Schwartz Biomedical, believes.
His six-employee company, he said, was started in 2004, has low overhead and essentially will be building future growth and budgets with the excise tax in mind.
Larger, more established companies, he said, have more overhead and complicated operational infrastructures to contend with. For them, Schwartz said, the excise tax will require an adjustment.
“They’re going to have to eat it somewhere,” Schwartz said, “and R&D is a good target.”
Schwartz said his company may also escape any significant impact from the tax because the product Schwartz Biomedical makes is unique and therefore may command a high price. Schwartz Biomedical is working on a self-lubricating polymer that may allow physicians to replace a portion of a damaged joint rather than the whole structure.
Larger medical device manufacturers in the region are indeed concerned about the excise tax, but they haven’t fully calculated its impact.
Bill Kolter, corporate vice president of public affairs for Warsaw-based orthopedic device manufacturer Biomet Inc., stopped just short of predicting a reduction in research and development as a result of the tax.
“Every company in this sector is committed to innovation that helps the lives of patients,” Kolter said. “Having said that, we’re obliged to look at our discretionary expenses in light of this tax, and one of those discretionary expenses is R&D.”
Kolter said it is unlikely Biomet will be able to pass any of the tax expense onto hospitals — the company’s primary customers — because they are dealing with their own health care reform issues, including expanded coverage for Americans but continued partial reimbursement rates for Medicaid and Medicare.
“In general,” Kolter said, “the environment to pass on new costs to hospitals is not going to be quite what it was. They’re under their own pressures.”
Kolter, who is also co-chair of the state manufacturers council’s advocacy committee, said another option that will be looked at is enhanced operational efficiency.
“That’s something we’re always looking to do — to increase efficiency. This may heighten the urgency.”
Brad Bishop, director of public affairs for Warsaw orthopedic manufacturer Zimmer Inc., said Zimmer applauds expanded health care coverage but disagrees with the imposition of the excise tax.
Bishop said it was premature to discuss the tax’s impact on research and development at Zimmer.
One thing medical device manufacturers may not be able to do to offset the tax is secure cost cuts from raw material suppliers. One of those suppliers is Fort Wayne Metals, which makes surgical and medical wire.
Larry Kay, director of technology for Fort Wayne Metals, said the company will be unable to satisfy any requests for reduced prices because the company is already grappling with the significant expense of the metals it uses in its products.
“We’re stuck in the middle, too,” Kay said.
Between now and 2013, Novelli said, his national trade association will work to either have the tax repealed or secure exemptions for smaller companies through a technical corrections bill. Among the measures the association will seek is a complete exemption for companies earning less than $100 million a year in annual sales revenue.
Kolter, meanwhile, said it is critical that the industry be allowed to flourish, especially orthopedic companies, which are facing an increasing demand from baby boomers who are living longer and expecting a higher standard of living in their later years.
He said orthopedic products save health care costs and boost the economy by helping people avoid unhealthy sedentary lifestyles and, in some cases, allowing them to return to work.
“We believe we create tremendous value for the health care system and the economy,” Kolter said. “Our products are designed to help people return to mobile, active lives. It’s great technology.”
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