Cook Medical caps capital investment in U.S., cites medical device tax

When the topic of the 2.3 percent medical device excise tax arises, Cook Medical‘s Scott Sewell is quick to frame the discussion around jobs.

Of Bloomington, Indiana-based Cook’s roughly 10,000 employees, 6,000 work in the United States; 525 in the company’s endoscopy unit in Winston-Salem, North Carolina. Sewell said that although the company has two new plants in Illinois and Indiana, in the last year the company has halted capital investments because of the cost uncertainty presented by the tax. Sewell said that the tax hike to the company comes to $23 million a year. Privately held Cook’s annual revenue is about $2 billion. Half of that comes from the United States.

I caught up with Sewell, vice president of technology acquisition and development at Cook, after the annual meeting of the North Carolina Biosciences Organization this week in Research Triangle Park, North Carolina. Sewell spoke up at the meeting and afterward he was eager to talk more about the tax’s impact.

The medical device excise tax, included in federal healthcare legislation passed last year, goes into effect in 2013. Supporters of the measure say that the addition of people to insurance company rolls as a result of healthcare reform will lead to more sales of medical devices. The higher sales will offset the impact of the new tax, according to a report from the Urban Institute. The spending and tax changes “are simply too small relative to the overall size of the economy to have much of an impact,” the report says.

Sewell disagrees with projections of higher medical device sales. Just because more people are insured doesn’t mean more medical devices will be sold. He adds that device makers will have a new tax without a way to pay for it. In order to pay for it, companies will cut from R&D, among other places. Sewell said that Cook has never had a layoff. But instead of leading to hiring, the tax could lead to the first job cuts in the history of the company.

A report from medical device industry group AdvaMed projects the tax will lead to 43,000 jobs lost from the more than 400,000 medical device company jobs in the United States. And here’s where it could impact Cook in North Carolina. Sewell said 70 percent of the gastrointestinal products produced at Cook’s Winston-Salem plant go to the world market. But if taxes make it cost prohibitive to manufacture in the United States, that work could go to a lower tax Cook operation, such as the company’s Ireland facility.

“Companies have a choice of where they’re going to manufacture,” Sewell said.

The debate continues. Legislation has been introduced in Congress to leave federal healthcare reform intact but repeal the tax. Stay tuned.