As far as the federal government is concerned, the beat goes on for the planned 2.3 percent medical device excise tax—as does the beat-down by the industry in voicing its continued opposition to that tax.
On Feb. 3, the U.S. Department of the Treasury released proposed regulations on how the device tax will be applied. While those proposals do set out some exemptions for early stage devices and also somewhat mollify those who had worried about a potential double tax for contract manufacturers, their release has spurred the medtech industry and its congressionalallies to accelerate their drive for repeal of the tax.
Part of the Patient Protection & Affordable Care Act that is scheduled to take effect next January, the medical device tax is a top-line tax that is to be applied to sales, which opponents say is particularly difficult on the smaller companies that make up the vast majority of the device industry.
The new guidelines, titled Section 4191 of Internal Revenue Code, outlined that “all devices that are listed under a single product code listing in conjunction with the FDA’s device listing requirement are ‘taxable medical devices’ unless they fall within an exemption.”
In general, a “taxable medical device” is one described by law as “any device defined under the Federal Food, Drug & Cosmetic Act as an instrument, apparatus, machine, contrivance, implant,reagent, or other similar or related article, including any component, part, or accessory that is recognized in the officialNational Formulary, or the United States Pharmacopeia, 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; or intended to affect the structure or any function of the body, and that does not achieve its primary intended purposes through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary intended purposes.”
Among the exemptions carved out by the Internal Revenue Service (IRS) are a specific retail exemption for eyeglasses, contact lenses, hearing aids, and any other medical devices purchased by the general public at retail for individual use.
Also exempted from the tax are instruments that fall under U.S. Food and Drug Administration (FDA) investigationaldevice exemptions and devices labeled for “research purposes only,” as well as devices used in veterinary medicine.
The industry has worried for months about potential double taxation of contract manufacturers and OEMs, but the IRS clarified that issue only somewhat by saying that if more than one entity is involved in the manufacture or importation of an item, the determination of which entity is, in fact, regarded as the manufacturer would be based on the “facts and circumstances of the arrangement.”
Addressing additional concerns that medical products organized into “convenience kits” would be double-taxed, the IRS guidelines say the tax applies only to the “entire sale price of the kit,” not once for the components and again for the final completed kit.
Especially outspoken about the device-tax issue were officials of the largest industry trade association, AdvaMed, along with Rep. Erik Paulsen (R-Minn.), who has been leading the congressional charge against the device tax. He said the report from the Treasury Department “further highlights the fierce urgency of repealing this job-crushing tax on innovation before it is too late. [This] move by the Obama Administration is further proof that the medical innovation tax will increase healthcare costs while putting thousands of jobs on the line.”
Paulsen said he plans to work with leadership of the House of Representatives to schedule a vote on his Protect Medical Innovation Act before the tax takes effect. Joining in the fight this recently were 75 freshmen congressional Republicans, who wrote a letter to House GOP leadership asking them to bring to the floor H.R. 436, the aforementioned Protect Medical Innovation Act of 2011. A little over a year since its initial introduction by Paulsen, the bill has just under 230 co-sponsors, and is plodding its way through committee.
Todd Rokita, a first-term Indiana Republican who is spearheading the freshmen’s push, said, “We must act now torepeal this onerous and irresponsible tax. With so many jobs hanging in the balance, this should not be a political issue.”Their letter cited the impact of the planned tax on smaller companies, which the politicos termed the “engine” of the U.S. economy.
The 75 lawmakers brandished theirpolitical bona fides by adding: “We believe this is exactly the kind of bill we were elected to pass.”
AdvaMed President and CEO Stephen Ubl said in a statement that the proposed IRS regulations highlight the need for “prompt action” by Congress and the Obama Administration to repeal what he termed “this anti-competitive, job-killing tax.” He said the continued failure to repeal the device tax “flies in the face of the president’s comments during the State of the Union about the need to reform our tax system to make our nation more competitive in the world market, a view shared by members of Congress from both parties. I’d like to keep the focus on the need to repeal the tax,” Ubl said.
As for the IRS guidelines themselves, he said AdvaMed will be “carefully examining the proposed regulation. Obviously, the rule is not going to do anything to simplify our tax code or make our tax burden more rational.” Ubl said that implementation will create “a number of complexadministrative and technical burdens that must be addressed.”
Four days after release of the IRS guidelines, Ubl and AdvaMed Chairman James Mazzo outlined the organization’s plans to unhook the “no device tax” effort from the health care reform debate and instead rebrand it as part of a tax reform push. “Let me make one thing very clear. This isn’t about health care reform,” he said. “Repealing the device tax is the first down payment on much-needed tax reform. The device tax had little to do with the Accountable Care Act, except that it was added to obtain $20 billion to help pay for the bill.”
In a statement issued the day the IRS guidelines were released, Mark Leahey, president and CEO of the Medical Device Manufacturers Association, also turned his group’s release into an opportunity to rail against the device tax. Citing what he termed the “complexities and unanswered questions” in the proposed regulations, he said they “show just how important it is to repeal the onerous medical device tax.”
Saying that the device tax threatens America’s traditional leadership position in medical innovation, Leahey added a final broadside: “It’s time to repeal this job-killing tax.”
A Vocal Hearing
During a recent hearing on the White House’s proposed budget for 2013 held on Feb. 15 by the House Committee on Ways and Means, Republican members of the committee took time out to grill Treasury Secretary Tim Geithner about the device tax.
“My district is outside of Philadelphia. We have a very significant medical device industry. And we’re very concerned that the 2.3 percent tax imposed as part of the Obamacare legislation actually will have the opposite effect,” said Rep. Jim Gerlach from Pennsylvania’s 6th District. “In fact, there was a study by AdvaMed that there would be about a 48,000 job loss in theindustry if this $20 billion tax over 10 years is implemented. So, based upon yourtestimony today that you intend to, as part of the administration, put forward a comprehensive corporate tax reform plan of action—although it won’t be in a legislative form. Will the repeal of the medical device tax be part of that? And if not, why not?
Geithner said it would not be part of that, but that he shared Gerlach’s concerns, and would be happy to discuss it moredetail with lawmakers and industry.
“Let me give you our general sense,” Geithner explained. “The Affordable Care Act will dramatically expand insurance coverage, as you know, for tens of millions of Americans. And therefore, we’re pretty confident that the net impact on businesses that are in the business of providing healthcare devices or otherwise will be very positive—substantially positive—even with the measures we propose to make sure we’re doing that in a fiscallyresponsible way.”
Gerlach was quick to respond.
“Well, given the nature of the tax, if you’re familiar with it, it’s a 2.3 percent tax on gross receipts right off the top. Whereas, many of the companies in our area—and Rep. Paulsen has been working very hard on this issue—many of these companies only have a net profit at the end of the day of only about 1 or 2 percent. So if you’re taking 2.3 percent off their gross revenues, you’re putting many of those companies at risk, and, in fact, allowing them to consider moving to other parts of the world to
undertake their R&D and their manufacturing. So again, what is it about the medical device tax you think somehow is going to create jobs, rather than what you agree is the purpose of corporate tax reform, which is to incentivize the growing of jobs here in the United States?”
Geithner reiterated that while he’d “be happy” to spend more time trying to understand lawmakers’ concerns, he believes that “on balance a mix of reforms that again will expand healthcare dramatically … will be very positive for American businesses that are in [medical technology].”
Rep. Paulsen added to the chorus of critics peppering the Treasury chief with device tax questions—a topic that certainly hadn’t been at the forefront of the day’s agenda.
“I want to follow up on this because I know in Massachusetts, which has some similar provisions that are in the president’s new healthcare law, there’s been no increased utilization of medical device sales. And [U.S. Department of Health and Human Services] Secretary [Kathleen]Sebelius has been here to talk about this as well. And my understanding is that 75percent of the folks that are uninsured are 45 years of age or less. And you know a lot of these medical devices that are life-improving, life-saving go to folks that are above age 45. And so I don’t think there’s data. If there’s data out there I’d like to see the data of what’s supporting it.”
Paulsen said the companies he represents in Minnesota are “very concerned” about the impact to research and development jobs.
“It’s about innovation—and the president has talked about that,” Paulsen said. “You mentioned it today, and I just really think this is an American success story as much as it is a Minnesota success story. This is a tax that’s about $20 billion over a 10-year period. It’s more than the amount of money that’s invested in this industry actually each and every year. So I really want to follow up with you if there’s actual data that’s going to support this down the road. In fact, Stryker—which is based in Michigan where the chairman and the ranking member [of the Ways and Means Committee] are from—is laying off 5 percent of their workforce this year because of the tax in anticipation. It’s a time bomb out there. This is a real issue.”
Paulsen has said that his bill to repeal the tax will be headed for a vote on the House floor in the near future. But while members of the House seem to be “fired up” about this issue, the subject of medical device taxes doesn’t seem to have nearly as much cache in the Senate. The upper house also has two pending device tax-repealing bills that have been referred to the Finance Committee, but there hasn’t been a lot of movement lately and given the Democratic control of the Senate, it’s likely that such legislation wouldn’t pass, particularly in an election year.
A public hearing on the final IRS regulations is scheduled for May 16.
—This report was compiled by Jim Stommen, contributing writer, and Christopher Delporte, editorial director.
Senator Seeks to Dampen China’s Price Control Threat with Diplomacy
There certainly is no shortage of headwinds that potentially could impact America’s medical device industry over the next few years, whether it be the sputtering economic recovery, increased scrutiny from U.S. regulators or the 2.3 percent excise tax set to take effect in 2013.
Now there’s another obstacle that possibly could thwart growth, particularly overseas: proposed price controls from China. The top Republican on the U.S. Senate Foreign Affairs Committee is warning that China’s proposed price controls on medical products could adversely affect both American companies and Chinese patients. Many U.S. medical device companies have made significant investments in research and manufacturing facilities in the Middle Kingdom, hoping to capitalize on the anticipated meteoric growth of that country’s middle class and demand for healthcare goods and services. Price controls, however, potentially could cut into profits and make American products less competitive in China.
Such controls also could exacerbate tensions between the two countries. China already has rubbed U.S. lawmakers the wrong way for allegedly manipulating its currency to boost exports. Using price
controls to squeeze out American medical products from its market—which could become the world’s largest—only would add fuel to the proverbial fire.
Sen. Richard G. Lugar (R-Ind.), though, is hoping to dampen the flames of impending controversy with a diplomaticapproach to the issue. He has urged Chinese Ambassador Zhang Yesui to consider the concerns of American device makers when debating the merits of a price control proposal unveiled last summer by theNational Development and Reform Commission (NDRC).
“Representatives of the industry have expressed serious concerns about medical device price controls proposed by the NDRC,” Luger wrote in a letter to Yesui. “I am hopeful that you will convey these concerns to appropriate agencies in your government and encourage them to engage further dialogue that could explore alternatives to price controls.
“This approach would be consistent with our mutual support for transparency and consultation as we work together to find mutually beneficial ways to further harmonize our commercial relations. Both the United States and China would stand to benefit from a solution that achieves China’s healthcare objectives without harming this important industry,” Luger concluded.
Coating Process Spurs FDA Warning Letter for Merit Medical
The U.S. Food and Drug Administration (FDA) has issued a warning letter to Merit Medical Systems Inc. over a coating procedure used in the company’s Irish factory.
The FDA, according to the South Jordan, Utah-based firm, cited the firm after noticing a modification of a coating used on the Merit Laureate guidewire, a device designed to help doctors place other medical devices (such as catheters) in blood vessels. Merit Medical makes the guidewire in its Galway, Ireland, facility and ships it to the United States. FDA supervisors noticed themodification during an inspection of thecompany’s facility last fall.
“We made what we believed were minor changes to the product over time, changes that we did not believe required us to getadditional approval from the FDA,” company Chairman and CEO Fred Lampropoulos told The Salt Lake Tribune.
The FDA, however, disagreed, claiming the changes “could significantly affect the safety or effectiveness of the device.” As aresult, the agency deemed Merit Medical’s guidewire adulterated and misbranded, and said it did not have either premarket approval or an investigational device exemption to sell the product. Lampropoulos said his company is working with the FDA to address the organization’s concerns and is hoping to quickly resolve the issues raised in the warning letter. He noted in a prepared statement that the letter applied only to the Laureate guidewires, which represented less than 1 percent of the firm’s total revenue last year. The Galway facility will manufacture other products as Merit Medical works to resolve the warning letter.
Founded in 1987, Merit Medical develops products used in interventional anddiagnostic procedures in cardiology, radiology and endoscopy. The company employs about 2,300 people worldwide.