Georgia medical device manufacturers say a 2.3 percent industry-wide federal tax on their sales revenue will jeopardize jobs and force them to pull back on crucial research.
The manufacturers argue that the tax — expected to raise about $30 billion over ten years that will go toward health care reform — is unfair. Bills to repeal the tax have been introduced in Congress, and U.S. Sen. Johnny Isakson is among those behind it. The tax went into effect Jan. 1.
Supporters of the levy say manufacturers’ concerns are exaggerated and point out that hospitals and drug makers are being taxed, too. Both sides downplay the direct impact on consumers.
Tax backers also argue that health care reform will result in an increase in business for device makers, helping offset the tax burden. That would happen because an estimated 30 million Americans who now are not covered are projected to obtain health insurance under reform, and that will make for a larger market to buy their products and increase their business.
The industry disputes this, saying the vast majority of the newly insured population will be relatively young and healthy, and not likely to need medical devices that typically are used by the older and infirm.
Tim Lusby, president of operations of Amendia, a Cobb County medical device maker, said that his company will have to pay a device tax of about $1 million based on projected 2013 revenue.
“We told all our employees that we’ve got to find a million dollars in cuts to neutralize this,” Lusby said. “It might be people.”
Amendia has about 70 employees.
Device makers say they can’t simply pass on the tax burden to buyers, such as hospitals. For one thing, marking up the price of a product leaves a company vulnerable to competitors who may choose to not raise prices.
For another, group purchasing organizations and integrated hospital networks, which contract on behalf of hospitals, have told hospitals to resist any proposed hikes.
Alven Weil, spokesman for Premier healthcare alliance, a group purchasing organization for hospitals in Georgia and other states, said the company “has informed contracted suppliers it will not accept the imposition of the medical device tax on any products or services that members purchase, now or in the future. It is our intent and expectation that, for all Premier contracted suppliers, there will be no increase in costs to our members.”
The Healthcare Supply Chain Association, a trade group that represents buyers, posts on its website the names of device makers who it says seek to pass on the cost of the tax.
“It would be very difficult, for the most part, to pass these costs on,” said Mark Leahey, president of the Medical Device Manufacturers Association.
So, Lusby said, “We’ve got to eat it.”
Leahey said the federal government has more than 7,000 registered device makers and that 80 percent have fewer than 50 employees. The MDMA says studies show there are more than 600 advanced medical technology companies in Georgia with about 8,000 employees, although estimates of both vary.
Small medical device companies stand to be hurt the most because they don’t have the financial means to absorb the tax, said Christine Jacobs, CEO of Theragenics, a Buford medical device manufacturer.
The estimated cost to her company, based on last year’s revenue, would be $1 million to $1.4 million.
“This tax is the equivalent of our 2013 (research and development) budget,” Jacobs said. “And, in this industry, you have to innovate or die.”
While it has its giants, the medical device industry is comprised of mostly smaller players who MDMA president Leahey characterized as “often a physician and an engineer working together … a uniquely American ideal of innovation and entrepreneurship.”
It’s an ideal that the industry’s supporters say is threatened.
In a statement, Sen. Isakson said: “Innovative medical technology companies are being forced to raise prices, lay off workers, and in some cases even move their operations overseas because of the unfair medical device tax.”
American medical device companies including Boston Scientific and Cook Medical have built manufacturing facilities overseas or backed off U.S. expansion plans in recent years “due to challenges” including the device tax, according to the MDMA
Those who support the tax don’t totally dismiss its impact.
“Any tax is going to have some negative effects on the industry that gets taxed,” said Paul Van de Water of the Center on Budget and Policy Priorities, a Washington think tank.
Van de Water doesn’t buy the argument that the tax will stifle innovation or cost jobs, but says, “There might be some specific case of a firm for whom this causes real problems.”
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