New Survey Takes Aim at Medical Device Tax’s Costs

The Advanced Medical Technology Association (AdvaMed) has fired the latest volley in its assault against the 2.3 percent medical device excise tax.

The association’s leadership recently gathered to discuss the findings of its recent tax-related survey, the current climate for repeal, actions at the state level, and the association’s broader objectives for 2014.

A year into implementation of the controversial tax and the debate hasn’t faded into apathetic acceptance. In fact, calls for removal seem to have intensified.

In fact, in an effort to protect their indigenous medical device clusters, many states are looking for ways to sidestep the national tax at the local level.

For example, a state lawmaker in South Carolina, Rep. Bakari T. Sellers (yes, he’s a Democrat), has introduced legislation with co-sponsor Rep. G. Murrell Smith Jr. (R), to provide a tax credit to Palmetto State companies developing or manufacturing medical devices, essentially reimbursing them for the tax. The legislation currently is before the state’s House Ways and Means Committee. If the measure passes, one of the big questions is whether other states—particularly those that are home to the country’s powerhouse device sectors—will follow suit.

AdvaMed officials told Medical Product Outsourcing that in the absence of action in Washington, many states may take it upon themselves to alleviate the tax’s burden.

“I think we’re seeing a range of activity in the states, tanging from what we see in South Carolina, which is a very specific tax offset oriented toward lessening the impact [of the tax] to companies in that state all the way to what we’ve seen in Indiana, Alaska and Ohio where they have resolutions essentially calling on the Congress to act to either repeal or delay the medical device tax,” J.C. Scott, senior executive vice president of government affairs for AdvaMed, told MPO. “The most activity is actually happening in Idaho where a resolution has been introduced and may get some consideration on the floor of that chamber. But I think that it just goes to show that there’s a fairly nationwide impact from the device tax and as Congress drags its feet on moving that across the finish line, other policy makers are trying to step in and address it in ways that they’re able to.”

Steve Ubl, president and CEO of the association, characterized such moves by states as a move to protect something important—particularly as many states look to expand their manufacturing sectors.

“What it points out for me, is that this an industry that states want to have,” Ubl told MPO. “This is a crown-jewel industry in the United States. We employ 2 million Americans; we pay 40 percent more than the average U.S. job, and states are competing to establish the friendliest climate to cultivate investment by medical device manufactures. I think you’ll continue to see incentives put in place to make states more attractive for companies to invest.”

David Dvorak, president and CEO of Warsaw, Ind.-based Zimmer Holdings Inc., and who also is wrapping up his two-year term as AdvaMed’s board chairman (a new chair will be named in March), said the same argument also takes on an international slant.

“The same characterization describes the global environment as well,” he explained. “When one travels outside the United States it’s interesting—the conversations that one has with policy makers including those that can make a determination about a local tax or provide incentives to draw jobs out of the United States for future expansion into their jurisdictions. They fully recognize the value of these high-paying jobs and the value these jobs bring to the local economy. So those conversations take place on a global basis, and I really think that’s something for all of us to keep in mind going forward. We won’t go backwards on the globalization of our economy. Capital is going to form on a global basis. Companies are going to grow up on a global basis. To the extent that bad policy ends up seeping into any particular jurisdiction, you can rest assured that companies will form elsewhere. Capital will form elsewhere to support the growth of those companies. So, getting those issues right is critical to the livelihood and competitiveness of U.S.-based companies—and being able to continue that unique U.S. success story.”

To help keep the pressure on lawmakers to keep that “unique U.S. success story” in view, the folks at AdvaMed released new survey results examining the first-year impact of the medical device excise tax. According to the survey of its member companies, AdvaMed is reporting a “significant reduction” in jobs, research and development (R&D), and U.S. investment. A total of 38 companies responded, which account for approximately 40 percent of the domestic sales revenues of AdvaMed members and approximately 15 percent of member companies. The survey responses were generalized to the industry as a whole based on the ratio of revenues of responding companies to revenues of the overall industry.

According to the report, the tax has led to employment reductions of approximately 14,000 industry workers and foregone hiring of 19,000 workers. The total job impact of the tax on industry employment was approximately 33,000. Independent estimates of the relationship between direct employment in the industry and indirect employment among suppliers and in the general economy found a ratio of four indirect jobs for each direct job. Applying this ratio to jobs lost or foregone suggests that the impact of the tax on indirect employment would be approximately 132,000 jobs, for a total job loss due to the tax of as many as 165,000 jobs.

The report also found that almost one-third of respondents (30.6 percent) said they had reduced R&D as a result of the tax. Almost 10 percent of respondents said they had relocated manufacturing outside of the United States or expanded manufacturing abroad because of the tax.

In terms of investment dollars, three-quarters of respondents said they had taken one or more of the following actions in response to the tax:deferred or cancelled capital investments; deferred or cancelled plans to open new facilities; reduced investment in start-up companies; found it more difficult to raise capital (among start-up companies); and, reduced or deferred increases in employee compensation.
While the focus of the survey was on effects of the tax in its first year, several questions were future-oriented and suggest that the tax will have additional negative impacts over time if not repealed. For example, 58 percent of respondents said they would consider reducing employment if the device tax were not repealed, and 50 percent said they would consider reducing R&D investment if the device tax were not repealed.

According to AdvaMed, responses were expanded to national estimates of employment impact using the following methodology. U.S. total expenditures on medical devices and diagnostics in 2010 were $156.3 billion. This figure was assumed to equal medical technology company revenues. This estimate was updated to 2012 using percentage increases in revenues in 2011 and 2012 for publicly traded “pure” device companies, yielding total industry revenues of $159.4 billion. Respondents to the AdvaMed survey represented 22.3 percent of total industry revenues ($35.5 billion), so job losses and jobs foregone reported by survey respondents were multiplied by (159.4/35.5) to arrive at an estimate for the industry as a whole.

Dvorak said the group’s top priority for 2014 remains repealing the medical device tax, and noted that AdvaMed remains “encouraged” that the proposals in the U.S. House and Senate continue to advance. The most recent House proposal had 270 cosponsors, including 43 Democrats, and the Senate’s repeal effort has 38 cosponsors, with six Democrats on board.

But even with those numbers, “we’ve been able to move the needle so far,” Dvorak said.

Ubl said supporters of the tax are “off base” with their arguments that the tax would be alleviated by other factors.

“Companies aren’t simply able to pass the tax on to consumers and they aren’t experiencing a windfall of new patients [as a result of the Affordable Care Act],” Ubl said. “This survey should serve as a wakeup call for policy makers. The tax is taking a heavy toll that will only grow over time. It’s bad for patients; it’s bad for jobs; it’s bad for innovation. As we think about our priorities. It’s important to reflect on macro environments. Our industry produces amazing technologies that help patients survive conditions that just a few years ago would have been a death sentence.”

The industry, Ubl said, also has embraced “new market imperatives,” with the development of technologies that “reduce costs, reduce hospital stays, and get people back to work more quickly.”

Among the association’s to-do list items for the coming year includes international expansion efforts. Plans to open an office in Shanghai, China, are moving forward, leadership said, including having an executive director based there. Ubl just returned from meetings in Brazil, which he says is another large market the association will be working to penetrate, along with increased focus on India.