RPC Reg Spotlight February 28, 2012

 

Regulatory Action in the Spotlight:

 

A tax on medical devices

 

Adverse Effects:

 

  • The tax will lead to a loss of jobs in the medical device industry. 
  • The tax will lead to less innovation.

 

Response of the Obama Administration:

 

A tax of 2.3% on U.S. sales of certain medical devices, such as stents, defibrillators, artificial hips and bedpans, will go into effect on January 1, 2013.   The tax would bring an estimated $2.67 billion a year in new revenues to the federal government.  On February 7, 2012, the Internal Revenue Service (IRS) unveiled a proposed rule (RIN: 1545-BJ44)that would provide guidance on the excise tax imposed on the sale of certain medical devices under section 4191 of the Internal Revenue Code.   The proposed tax affects manufacturers, importers, and producers of taxable medical devices.  In detailing what a medical device is, the IRS states that it is intended for human use, is an instrument that is recognized in the official National Formulary or the United States Pharmacopeia, is intended to be used for the diagnosis or cure of a disease, or is intended to “affect the structure or any function of the body”. 

 

Impact on the United States:

 

The United States is the world’s leading exporter of medical devices.  A medical devices industry report claims that 43,000 jobs will be lost because of the new tax, which is approximately 10% of the 422,000 medical device employees in the nation.  Industry analyst Jeff Jonas said that the tax could cut a company’s U.S. profits by 3 or 4 percent. 

 

Stryker Corporation, a Michigan-based orthopedic device company, announced in November its intention to lay off 5% of its workforce ahead of the medical device tax being implemented.  The company expects large layoffs and fundamental restructuring in order to reduce costs by more than $100 million before the tax is put into action in 2013.  Stryker CEO Stephen MacMillan said: “There is no doubt that we're already starting to think about actions that offset that additional tax.  Here we are, one of the greatest industries in the country, and we're staring down on January 1, 2013 and the addition of a 2.3 percent excise tax, while meanwhile on the other side all the discussion in Washington is about creating jobs.” 

 

The tax will cost Cook Medical Inc., the world’s largest privately owned medical-device company, about $17 million annually.  Cook Group Inc. President Kem Hawkins says, “That's a plant a year that we're not able to reinvest in. Or it's a large clinical study that we can't invest in. Or it's maybe 10 or 12 or 15 new product innovations that we can't reinvest in.  If we can't build the plants, then we can't hire the people.”  Zoll Medical Corp. CEO Rick Packer said the tax would result in less investment in research and development: “That means fewer jobs for engineers.”

 

The medical device tax could also provide an incentive for the industry to look to other countries in selling their newest products.  As the American Action Forum recently stated:

 

“There is no doubt that the excise tax will place a heavy burden on device companies, costing jobs and slowing innovation. And because the tax does not apply to exported devices, manufacturers have an incentive to focus on EU approval in advance of FDA approval since the European market will be more appealing sans taxation. American patients, therefore, will have to wait longer for treatment options that other countries are already benefitting from.”

 

In Closing:

 

According to a medical device industry survey from Emergo Group, more than 70% in the industry believe the excise tax will have a “very negative” or “somewhat negative” impact on their businesses.  By choosing to tax medical devices as one of the ways to pay for the PPACA, an important U.S. industry’s growth will be restrained, innovation will be impeded, and jobs will be lost.  

 

Relevant Legislation:

 

On January 25, 2011, Rep. Erik Paulsen introduced H.R. 436, The Protect Medical Innovation Act.  On January 26, 2011, Rep. Jim Gerlach introduced H.R. 488, Save our Medical Devices Act of 2011.  On February 16, 2011, Rep. Brian Bilbray introduced H.R. 734.  These bills seek to repeal the medical device tax found in the Health Care and Education Reconciliation Act of 2010.