We were disappointed to hear Treasury Secretary Jack Lew defend yesterday the onerous medical device tax that went into effect on January 1st as part of the Affordable Care Act. While Lew admitted that the idea behind the tax was not to target startup medical device companies, the reality is the 2.3 excise tax impairs innovation as it is imposed on all revenues rather than just profit. It is clear that Lew is out of touch with the greater comprehension of the harmful nature of the tax as just last month 79 senators voted in favor of its repeal, demonstrating strong bipartisan support during the budget debate.

The NAM urges the Administration to look at the real world effects the medical device tax is having on manufacturers competing in the global marketplace and to recognize the Senate’s strong vote as marker of bipartisan understanding that the tax is indeed hurting jobs, investment and the ability for the United States to maintain its position as the global leader in medical technology innovation.

Tomorrow the Ways and Means committee will mark up the Protect Medical Innovation Act of 2011 (H.R. 436), repealing the 2.3% excise tax on the gross sales of medical devices included in the health care reform law. Set to take effect in 2013, this excise tax is estimated to cost US businesses close to $30 billion in new taxes. This will effectively back companies into a corner to scale back operations and cut resources for R&D, thus stifling innovation and forcing job cuts.

This industry-specific tax will be particularly harmful for small to medium sized manufacturers (80 percent are companies with 50 or less employees, 98 percent have 500 employees or less), as the tax is assessed on a company’s sales rather than profits. In fact, many companies have already announced layoffs in anticipation of the effective date.

Medical device manufacturers have been a shining star throughout our economic recession and the US continues to be the world leader in manufacturing life-saving and life-enhancing treatments. We should not constrain this segment of the manufacturing community, but rather see that their success continues well into the future. The NAM strongly supports rolling back this tax before it takes effect.  We need to ensure that medical device manufacturers are able to remain dynamic and innovative in order to improve the quality of life of patients.

 We’re pleased to hear that early next month members of the House of Representatives will have the opportunity to vote to “excise” from the Internal Revenue Code, a new tax on medical devices set to begin in 2013. This ill-conceived 2.3 percent tax on gross sales of medical devices manufacturers was part of the health care reform law.

By increasing the costs of medical devices, the excise tax will hurt the companies and their workers and also stifle the research and innovation that leads to the development of medical products that contribute to the health and well-being of all Americans.

Moreover, as today’s Wall Street Journal points out, perhaps the most damaging impact of the excise tax is on U.S. competitiveness. With Europe, Israel and Asia working hard to take over the United States’ lead in the life sciences, a tax like this will only make their job easier. Let’s hope the House gets the ball rolling and Congress sends a bill to the White House as soon as possible that would stop this job-killing tax before it even starts.

It’s hard to imagine the discussions that went into the writing of the legislation to expand the federal government’s role in health care, the Patient Protection and Affordable Care Act:

But how do we pay for all this?

Well, our medical device industry is the global leader, innovating and really stimulating economic growth.

Good, let’s tax it!

Which leads us to this entry in the new report from Sens. Tom Coburn (R-OK) and John Barrasso (R-WY), both doctors, “Grim Diagnosis – A check-up on the federal health law.”

Companies that innovate, create, and develop life-saving, life-improving devices will likely lose jobs too. Manufacturers of medical devices are reeling from a provision of the law that will levy a $20 billion excise tax on their industry. The Boston Globe reported that the 2.3 percent excise tax on companies that supply medical devices like heart defibrillators and surgical tools to hospitals, health centers and ambulance services, will force industry leaders to lay off workers and curb the research and development of new medical tools. One CEO said the new tax threatens his business‘ sustainability because it has relegated his company‘s profitability to merely a break-even position.

The basic problem with the tax is one of math. Many small to midsize medical device companies will owe more to the federal government in taxes than they make in profits, according to Mark Leahy, head of the Medical Device Manufacturers Association. “We’re talking about a 2.3 percent tax on total sales, irrespective of whether a company is making a profit.” The device tax will hamper innovation, since the amount of money available for a company to reinvest in its business development will be reduced. Some companies are already contemplating moving jobs overseas to avoid losing their competitive edge. Outsourcing is just one of many adverse unintended consequences of the new law.

The news release is, “Drs. Coburn and Barrasso Release New Health Care Report.” Jobs will be lost.

NAM President John Engler mentioned the medical device industry in remarks at the Managing Automation Summit in Palm Beach, Fla., yesterday, remarking that it was one of the industries where U.S. industry is an indisputable global leader. And how does Congress treat this center of competitiveness and innovation? By taxing it to pay for an expansion of health care?

Here’s the inevitable response, via The Boston Herald, “Mass. device firms see health law as burden“:

Massachusetts medical-device companies say they’ll cut back on operational costs – and jobs – after a planned 2.3 percent tax on their products is implemented in 2013, according to a new survey.

The Massachusetts Medical Device Industry Council, which held its annual meeting yesterday in Boston, said about 90 percent of the 100 medical-device firms said they would reduce costs due to the new tax tucked into the recently passed health-care reform bill.

The tax – imposed to help pay for the massive health-care industry overhaul and expansion – is “of the greatest concern” to a majority of its members, the survey found.

MassDevice, an online trade publication, also covers the survey, “Survey: Device tax could force job cuts, higher prices.”

The Business Council of Alabama and the Alabama Technology Network held their annual Manufacturer of the Year awards event Wednesday, with three innovative manufacturers receiving recognition. The National Association of Manufacturers helped sponsor the awards, and NAM President John Engler provided a video salute to the honorees.

Large Manufacturer of the Year: ADTRAN, Inc. is a leading global provider of networking and communications equipment, providing solutions for voice, data, video and Internet communications across a variety of network infrastructures. ADTRAN, Inc. has been recognized by Fortune Magazine as one of the nation’s 200 Best Small Companies, as one of the “40 Best Stocks to Retire On,” and in 2009 was voted one of the Best Places to Work in Huntsville/Madison County.

Medium Manufacturer of the Year: STERIS Corporation, Montgomery is a leading provider of infection prevention and surgical products and services for the health care industry, serving thousands of customers in more than 60 countries. The Montgomery facility’s 260 employees produce a variety of products for the operating room and surgical environment, including surgical tables, lighting systems, scrub sinks, stretchers, warming cabinets, and equipment management systems that provide medical personnel ready access to medical gases, electrical power, and communication services.

Small Manufacturer of the Year: Turner Medical of Athens transitioned from a leading supplier of automated equipment for the automotive and appliance industries to a manufacturer of surgical instruments for the medical industry. Today, Turner Medical is one of the highest quality medical manufacturers in the Southeast and one of the fastest growing facilities in north Alabama. Turner Medical’s 80 employees supply a wide variety of surgical instruments as well different implantable rods, plates and screws to the orthopedic medical history.

Congratulations to all three. Innovation, investment and excellence occur across all sectors of industry, but it’s certainly no surprise to find outstanding examples in telecommunications equipment and medical device manufacturing — areas where the United States remains a global leader.

Congress asks, how can we screw that up?

A tax on medical devices is a good start. From The Boston Herald, via The Daily Caller, “Health-care sales tax could kill thousands of Bay State jobs“:

A dire warning from Bay State medical-device companies that a new sales tax in the federal health-care law could force their plants – and thousands of jobs – out of the country has rattled Gov. Deval Patrick, a staunch backer of the law and pal President Obama.“This bill is a jobs killer,” said Ernie Whiton, chief financial officer of Chelmsford’s Zoll Medical Corp., which employs about 650 people in Massachusetts. Many of those employees work in Zoll’s local manufacturing facility making heart defibrillators.

“We could be forced to (move) manufacturing overseas if we can’t pass along these costs to our customers,” said Whiton.

U.S. Senate Republicans also identified the Medical Device Tax as damaging policy and potentially good politics, proposing amendments during last night’s debate on the reconciliation bill.

• Senator Hatch: Protect Wounded Soldiers from Medical Device Tax
• Senator Inhofe: Protect Pediatrics and Disabled from Medical Device Tax
• Senator Crapo: Protect Cancer Patients from Medical Device Tax
• Senators Roberts, Inhofe, Brown, Crapo: Strike Medical Device Tax

Subtitle E, Section 1405 in the House substitute amendment to the health care legislation is “Excise tax on medical device manufacturers”

The section states:

SEC. 4191. MEDICAL DEVICES.
(a) IN GENERAL.-There is hereby imposed on the
sale of any taxable medical device by the manufacturer,
producer, or importer a tax equal to 2.9 percent of the
price for which so sold. 

There are exemptions for eyeglasses, contact lens, hearing aids and items purchased by the general public at retail stores, things like tongue depressors. Even with the exemptions, there’s much covered under the bill’s definiion of “taxable medical device,” which “means any device (as defined in section 201(h) of the Federal Food, Drug, and CosmeticAct) intended for humans.”

From the FDA, “Is The Product a Medical Device?”

Medical Device Definition

Medical devices range from simple tongue depressors and bedpans [presumably exempt as noted above] to complex programmable pacemakers with micro-chip technology and laser surgical devices. In addition, medical devices include in vitro diagnostic products, such as general purpose lab equipment, reagents, and test kits, which may include monoclonal antibody technology. Certain electronic radiation emitting products³ with medical application and claims meet the definition of medical device. Examples include diagnostic ultrasound products, x-ray machines and medical lasers. If a product is labeled, promoted or used in a manner that meets the following definition in section 201(h) of the Federal Food Drug & Cosmetic (FD&C) Act it will be regulated by the Food and Drug Administration (FDA)⁴ as a medical device and is subject to premarketing and postmarketing regulatory controls. A device is:

• “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is:
   
  • recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them,
  • intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or

intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of it’s primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.

 Funny how health care “cost controls” so easily morph into tax increases.

Anticipating Thursday’s Blair House event, President Obama’s health care plan provides some more detail than the White House’s previous proposals. Bloomberg:

Feb. 22 (Bloomberg) — President Barack Obama proposed the first Medicare tax on unearned income including capital gains, while raising fees on drugmakers and scaling back a levy on high-end benefits as part of a new plan to overhaul the nation’s health-care system.

The Obama plan released today marks a reversal from months of leaving the details of the legislation largely up to congressional Democrats, and is intended to break an impasse in negotiations. Much of the proposal draws from separate bills passed by the House in November and the Senate in December.

This morning we predicted the White House would provide “framework of principles of conceptual reforms,” but in fact, the website provides a little more substance than that. A little more. For example, on the revenue side, Title IX, one section states:

Title IX. Revenue Provisions
Health Industry Fees

The Act will impose fees on various sectors of the health industry, intended to recapture some of the benefits they get as more Americans purchase health insurance. These include: (i) a fee on branded prescription drug pharmaceutical companies in proportion to their federal sales; (ii) an excise tax on medical devices; (iii) an annual fee on health insurance companies; and (iv) an excise tax on indoor tanning services.

You can dig down further for more information. For example, on the medical device tax, there’s explanation in the “Other Policy Improvements” section:

Delay and Convert Fee on Medical Device Manufacturers to Excise Tax.
The medical device industry also stands to gain from expanding health insurance coverage.  Both the House and Senate bills raise $20 billion in revenue from this industry over 10 years.  The President’s Proposal replaces the medical device fee with an excise tax (yielding the same revenue) that starts in 2013 to facilitate administration by the IRS.

Replacing a fee with a tax! Now that IS reform.

This is just a quick reax from one blogger (with an interest in the medical device industry, under so much attack on the litigation front.) The NAM will have a statement later in the day.

Rep. James Sensenbrenner (R-WI) from The Congressional Record, page E90:

[In] another bad move for my State, the Senate version proposes an additional $2 billion annual tax for each of the next 10 years on medical device manufacturers. This would negatively affect good companies, such as GE Healthcare in Waukesha, Wisconsin, and hundreds of our small business suppliers. In addition to stifling innovation and hindering research and development, the added costs would hurt consumers, as anyone purchasing medical products, such as wheelchairs, or whose care includes the use of equipment, such as an MRI machine, would feel the pinch. 

The Washington Post today runs a good scene-setting article on the economy and its effect on the people of Lorain County, Ohio, where President Obama will speak today. From “Assessing Obama’s promises of jobs in a hub of manufacturing“:

One of the few large businesses that has prospered in Lorain County in recent years has been Invacare, a maker of home medical devices, such as walkers and wheelchairs.

The company has 1,300 employees in Lorain County but has stopped hiring in anticipation of a tax on medical devices that was proposed to help pay for the president’s health-care reform plan.

A. Malachi Mixon III, who led a group of investors who bought the company from Johnson & Johnson in 1979, said the tax would cost his business $15 million a year — as much as he spends on research and development. If a tax were enacted, he said, he would seriously consider moving jobs to his factories in China and Mexico.

“I’m not making money in my Lorain plant now,” said Mixon, who has suspended contributions to the company 401(k), and frozen executive salaries in anticipation of the tax. That, in turn, has left many of his employees nervous.

“This tax will ultimately result in the loss of company revenue/profits, which will in turn, result in the loss of jobs for Invacare and Lorain County,” read an e-mail sent to county Democratic Party officials in advance of Obama’s visit by Joe Simonetti, who identified himself as a company employee. “I, personally, would rather pay more in taxes than to have Invacare pay the tax, just so I can keep my job.”

And from the local Fox affiliate, interviewing Elyria Mayor Bill Grace, who will meet one-on-one with President Obama:

Grace says he has met with many residents and business owners so he can present some of their concerns to the President. He said small businesses are worried because they are having trouble getting short term financing to build inventories and continue manufacturing goods. He said the health care bill is also a major worry for the city because a portion of the bill could affect Elyria-based Invacare.

“We’ll see but the early analysis is it will be detrimental to Invacare and they will have to look at manufacturing products overseas to avoid the tax that may be imposed through this health care bill,” Grace said.