As MITA, AdvaMed and the MDMA announced July 15 that medical device manufacturers have already passed the $1 billion-dollar mark in medical device excise tax payments, business leaders from startups to the old hats said it will affect jobs, U.S. growth in the industry and patient care. Cuts have to be made somewhere, and that somewhere is in the operational budget.
“The billion dollars paid already this year is a billion dollars taken out of our economy, out of our jobs,” said AngioDynamics CEO Joseph DeVivo.
“You can’t do this with paperclips,” said Steve Ferguson, COOK Group Chairman of the Board. He said companies must choose between salaries, R&D or capital. “In our case, we chose capital, looking to do our capital expansions overseas.”
Which could prove to be a devastating blow to the Hoosier economy. COOK is headquartered in Indiana, a state that has almost 20,000 medtech jobs, according to AdvaMed.
There, Sen. Joe Donnelly (D) and Sen. Dan Coats (R) have been “extremely active” in the repeal effort, Ferguson said. They, along with Sen. Orrin Hatch (R-Utah) and Sen. Amy Klobuchar (D-Minn.), introduced the amendment in the house in March.
“We need to make every effort to encourage, not stifle, continued growth in our manufacturing sector, including the medical device industry,” Donnelly said in March. “Indiana is home to many innovative medical device companies, and I support repealing the medical device excise tax because it makes sense for Hoosier businesses, workers and the patients who use their products.”
The $1 billion-dollar announcement, likely made to ruffle some red and blue feathers, reminds politicians to continue to push forward with repeal. DeVivo said AdvaMed has been working with politicians to find a good time for such legislation.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
But, as politics wears on at its usual rate, businesses feel the pinch in the meantime.
“There has been damage done to our industry. We’re already seeing investment into new small business medical devices wane. We’ve already seen large companies choose to launch products overseas first. It needs to be repealed quickly to see a reverse of what’s been done at large,” DeVivo said.
In five months, DeVivo said the tax has run AngioDynamics roughly $1.8 million, or 30 to 50 percent of overall profits. They’ve trimmed marketing and educational programs, as well as R&D. The $4.1 million he anticipates the company will owe by the end of the fiscal year is equivalent to about half of AngioDynamics’ profits last year.
“It’s an investment we could be putting back into this weak time in our economy.”
In preparation for ACA-compliance, hospitals are already trying to cut costs, and in a weaker economy, customers want cheaper options and don’t opt for elective procedures, DeVivo said. In essence: “We’re getting hit twice, and it’s having an accelerating and punitive impact on our industry.”
Because of this, AngioDynamics, like COOK, is also contemplating overseas options.
Foreign markets also benefit smaller businesses for (is it possible?) potentially more obvious reasons.
“We do not pay the tax on our exports which, fortunately, is about 30 to 40 percent of our sales,” said Lynn Cooper, President of BFW, Inc., a small Louisville, Ky.-based company that manufactures (among other things) surgical headlights, in an email.
Yet, even with this loophole, the tax still seems to be most detrimental to small businesses and startups.
“It will affect COOK differently than a startup that has no income, where it’s just an expense, those companies that are in the threshold stage who have revenue but aren’t yet making a profit,” Ferguson said. “That translates to patients.”
Ferguson said such an orthopedic company in Warsaw, Ind., that specializes in devices that help children walk “that can’t walk” does about $30 million in sales each year but isn’t profitable yet is having to cut R&D projects.
Suppliers are raising prices due to the tax, which slashes the bottom line in terms of marketing and new product development, Cooper said.
As a small business owner, Cooper has had to reconsider some employee benefits and delay filling a “much-needed” position. She hopes to hire someone by year’s end, but “it will be tight.”
If the tax isn’t, or can’t be, repealed soon enough, there are measures that could be taken to protect small businesses, Cooper said.
“There are many medical device companies that will see no increase in product usage once Affordable Health Care gets going. A hospital will not purchase more headlights and light sources as there are only so many operating rooms they need to populate with my products. If a business can make a case for not benefitting from the influx of patients the government says the Affordable Health Care Act will bring to the device industry, then that business should not be required to pay the excise fee.”
Yet DeVivo doubts the promised influx of patients will materialize. And with this kind of policy, he is concerned about the future of the U.S. as an industry leader.
“If you were going to start up a medical company, you were making an investment looking for profitability, would you start it somewhere where you have to pay 2.3 percent of your revenue?” DeVivo asked.
The tax, plus a strenuous and slow FDA approval process, makes one easy decision for startups.
Advice from the veteran Ferguson to potential med device business owners: “You don’t want to incorporate in this country.”
