Devices & Diagnostics

From absurdity to reality? Medical device tax jolts Invacare CEO Malachi Mixon

A. Malachi Mixon III, chairman and chief executive of Invacare Corp., shook his head in disbelief when he heard that the head of the Senate Finance Committee wanted to tax medical device sales to raise $4 billion a year to pay for health care reform. Now that the absurdity is on the verge of becoming a reality, Mixon is speaking out.

ELYRIA, Ohio — A. Malachi Mixon III, chairman and chief executive of Invacare Corp., shook his head in September when he heard that the head of the Senate Finance Committee wanted to tax medical device sales to raise $4 billion a year to pay for health care reform.

“To be honest with you, when I first heard about this, I thought it was so absurd, it will never make it” into final reform legislation, said Mixon, whose company makes medical devices from complex, rehabilitative wheelchairs to oxygen systems for home health care.

But on Dec. 28, a modified version of the proposal did make it into the Senate’s health care reform bill. “All of a sudden, this thing passed. I couldn’t believe it. I can’t believe this is happening to our country,” he said.

While a lot of medical device companies are ignoring the looming tax — it might not happen, they reason — Mixon and Invacare are taking a different approach. “We told our shareholders about the risks. I’m openly talking about it,” Mixon said.

Last week, Invacare disclosed to the U.S. Securities and Exchange Commission that it expects to pay between $12 million and $14 million a year on U.S. sales of medical devices. To start saving money this year to pay the tax that’s due next year, Invacare has “already taken steps to suspend matching contributions under its 401(k) retirement plan, suspend merit pay increases for management employees and freeze new hiring,” according to its SEC filing.

Mixon talked to MedCity News about the proposed tax and what it would mean for Invacare and its industry.

Q. How do you describe the legislation in both the House and Senate that would tax U.S. sales of medical devices?

A. The unfortunate thing about the tax is it is based on your sales, not on your profits. That means small companies with thin profit margins — or worse, losses — would pay proportionately more than large companies with decent margins.

For instance, Invacare lost money on its U.S. sales in 2008. The Senate tax is not deductible. In order to pay that tax, I would have had to make enough money to pay the federal tax, the state tax, the city tax and then this new device tax.

Q. What products made by Invacare are “medical devices”?

A. All of our products are medical devices. Class 2 and Class 3 medical devices would be taxed under the proposed law. Invacare makes Class 1 (not taxed) and Class 2 devices. We don’t make any Class 3 devices like stents or heart valves.

Q. The Senate’s version of the tax started at $4 billion a year. Now, it’s $2 billion a year. What happened?

A. What we understand happened is very large companies through their association, AdvaMed, negotiated the tax down from $40 billion over 10 years to $20 billion. I wasn’t consulted. Our industry — home health care device makers — wasn’t consulted.

We belong to the Medical Device Manufacturing Association, a small group of about 225 members. Our members’ profit margins average 3 percent — pretty thin.

Q. In Washington, some are rationalizing the tax by saying companies that benefit from health care reform should help pay for reform. Do you agree?

A. We’re not going to sell any more wheelchairs as a result of health care reform. Most of our patients are covered by the federal Medicare or Medicaid programs. The prices for their devices are set by the government. We don’t feel we benefit from reform. So, I don’t feel we should pay $12 million to $14 million of tax on top of those we already do.

Q. Invacare has suspended 401(k) account matches and merit pay, to start saving money to pay the tax. It’s also stopped hiring. What else might Invacare need to do to pay this tax?

A. It’s a jump ball. We’re looking at everything. The last thing we want to do is have layoffs. But we’re looking at price increases, moving our U.S. operations to lower-cost countries and cutting employee benefits and research and development spending.

Q. Why are you speaking out about the tax and what are you saying?

A. I owe it to my shareholders to fight this thing to the end. If Invacare’s stock price suffers, so be it. I’m not doing any saber-rattling.

We’re talking about three things. We’re opposed to the tax, we don’t think it’s fair. Two, if there is to be a tax, it ought to be based on profits or gross margin, not on sales. Three, it ought to be delayed to give companies time to figure out how to pay the tax.

Q. So Invacare was hiring before the tax was proposed? That must mean things were going pretty well.

A. We’ve had our challenges. But we’ve grown from obscurity to the largest manufacturing company in Lorain County. We’re doing pretty well. Then this thing comes out of the blue.

This is not the way to pay for health care coverage for more people. Home health care device makers are the solution to the high cost of health care. We’re inventing devices that allow people to live longer lives, to live more cost-effectively at home. And to hurt us doesn’t make any sense.