Don’t Tread on Us

We’ve all heard the old saying that nothing is certain except death and taxes. Well, tomonkey with the adage a bit, a proposed tax could be the death of innovation in the medical device sector if left unchecked.

As part of his $900 billion proposed healthcare reform legislation, Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, has proposed that $40 billion in fees ($4 billion a year over 10 years) be levied against the medical device manufacturing industry. The tax would apply to any manufacturer of medical devices sold in the United States, including foreign device firms and importers. The proposal does not set a specific rate for companies, but fees would be imposed based on individual manufacturers’ U.S. sales during the prior year. The legislation exempts companies with less than $5 million a year in revenue. Firms making between $5 million and $25 million annually in sales would get a 50 percent reduction in the tax assessed to larger firms making $25 million a year or more. To add insult to injury, the fees would begin immediately, with the start of the federal government’s fiscal year, which began on Oct. 1.

Industry trade groups such as the Advanced Medical Technology Association, the Medical Device Manufacturers Association (MDMA) and the Massachusetts Medical Device Industry Council, of course, have been out in full force to keep such a provision from becoming law or to at least reduce the annual $4 billion target. As recently as Oct. 2, the Senate’s Finance Committee voted to keep the medical device provision as part of the reform bill. Committee member John Kyl (R-Ariz.) had proposed that the language regarding devices be removed. The vote was along party lines. Democrats control the committee with a 13-10 majority. Despite their vote to the contrary, several committee Democrats—including John Kerry (Mass.), who represents one of the largest medical device areas in the United States—have indicated that they’re amenable to device tax alternatives. So far, however, no device tax alternative has generated any traction on Capitol Hill.

None of the proposed healthcare reform bills adopted in other Senate committees would tax device companies, and the U.S. House of Representatives’ proposed reform legislation also does not call for a device tax. The Finance Committee is the last of five in Congress to vote on a healthcare plan, and it is expected to approve the measure, once again along party lines. A vote is expected before this issue ofMedical Product Outsourcing goes to press—so, unless the industry’s efforts are successful, this may be a moot point very soon. If the measure passes as expected, Senate Democratic Leader Harry Reid (Nev.) will merge the Senate Finance bill with one passed by the Health, Education, Labor and Pensions Committee (a tall order indeed) and move the combined legislation to the floor for a vote. There still would be some maneuvering possible by the industry prior to final passage.

Scott Mulhauser, a spokesperson for Baucus, told the Associated Press that the tax is only fair and that hospitals and drug companies have volunteered to take cuts to help pay for the healthcare overhaul so the medical device industry should too. “Revenues to the device manufacturing industry will go up as insurance coverage expands, and this fee will ensure the industry helps contribute to the reform effort as it benefits,” he argued.

Governors from California, Minnesota, Nevada, Indiana and Utah sent a letter to Baucus outlining their opposition to the proposal. “We all support healthcare reform, but special taxes on the companies that bring high-quality, innovative solutions to healthcare professionals and their patients runs counter to the goals of better healthcare for Americans,” they wrote. Lawmakers from California also sent a letter explaining that the $4 billion exceeds the $3.7 billion in venture capital funding received by the medical technology sector and is roughly half of the $9.6 billion in total research and development investment made by the industry in 2007.

There’s no question that healthcare reform is critical—perhaps imperative is a better word. The current system is inefficient, and more Americans need access. But the situation will not improve if sanctions are imposed against those who hold the keys to solutions that help provide the most efficient and effective care. This tax will stifle R&D, curtail innovation (which has made the U.S. device industry the world’s leader) and result in swift job losses. Who does that help? Today’s standards of care were yesterday’s breakthroughs. What happens in an environment where those ideas aren’t given a chance to demonstrate their value or even to reach the market?

Thomas Novelli, director of federal affairs for MDMA, told MPO that his association “remains adamantly opposed to the proposed fee” and that they will continue to fight for its removal. I hope his efforts—along with those of countless others—are successful in combating this ill-conceived idea. Again, as I’ve written in this space many times, the device industry’s outsourcing partners have an important role to play and a voice in the process—now more than ever. If medical device OEMs aren’t innovating, their need for technologically advanced contract manufacturing partners and suppliers also suffers.