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Industry Looks to Derail the Return Of Medical Device Tax

A 2.3 percent excise tax on all medical devices sold in the U.S. could resume in 2018, sparking a renewed push among San Diego’s medtech hub to scrap the measure.

San Diego-based companies like ResMed and NuVasive Inc. argue the tax stifles research and development, job creation and innovation.

The tax on devices like artificial hips and pacemakers was first imposed in 2013 to help pay for the Affordable Care Act, but a bipartisan decision put a moratorium on the tax in 2016 and 2017. Without action, it will take effect again Jan. 1.

“Every dollar that goes to the tax is a dollar that you have to try to replace from elsewhere as you invest in R&D,” said Carol Cox, NuVasive’s executive vice president of external affairs.

NuVasive, which makes spinal surgery products, has publicly committed to increasing R&D spending as a percent of revenue from 5 percent to 7 percent over the next several years. But Cox said the tax’s return would keep the company from making even bigger R&D investment pledges over the long term.

The tax’s suspension, for instance, played a part in the company ramping up hiring at its manufacturing facility in Dayton, Ohio, she said.

“There were more funds that were freed up,” Cox said, adding: “The suspension of the device tax made the likelihood of those things happening faster.”

Tax on Sales

Cox said smaller companies would be more likely to feel the pain of the tax than NuVasive, which is expected to reach more than $1 billion in revenue in 2017. That’s because it’s a tax on sales, not profit.

It can take years for smaller companies in the medtech arena to be cash flow positive, and they rely on revenue for investment in building out their companies.

An effort to kill the medical excise tax has been tied to repealing and replacing the Affordable Care Act. With that stalled, the medical device industry is looking at additional bills in which to attach the tax elimination.

“We’re very open to working with the leadership of the parties, recognizing there are a lot of vehicles that this could happen,” said Brendan Benner, vice president of public affairs of the Medical Device Manufacturers Association.

Despite Congress being busy in the coming months, Benner is optimistic.

“This has always been a bipartisan issue. So the good news is that this is a matter of when it’s going to get done, not if it’s going to get done,” Benner said.

So why hasn’t it happened? Benner cited the difficulty of getting legislation, even if it has strong support, through Congress in the last two years.

“We talk to members in Congress of both parties day in and day out, and we agree that we have to get this done,” said Benner. He added a broad swath of Southern California representatives have opposed the tax, with San Diego Congressman Scott Peters being particularly vocal.

Industry Is Seeking Full Repeal

Benner said the industry is seeking a full repeal, as opposed to another suspension, since companies forecast years in advance on product development, growth projections and hiring.

The Medical Device Manufacturers Association recently conducted a survey of 107 executives from medical device companies, which found the two-year suspension provided an industry boost. As a result of it, 70 percent of companies increased hiring, and that on average, there was a 19 percent increase in research and development funding.

The conservative-leaning think tank American Action Forum estimates that if the tax comes back in 2018, around 25,000 jobs could be lost by 2021.

Cos. Need to Share the Burden

Not all are against the tax. In an Aug. 13 Associated Press article, John McDonough, a professor of public health policy at Harvard University, said that insurers and hospitals saw higher taxes and fees under the ACA, and that the medical device industry is trying to get off the hook.

Similarly, proponents say it’s an important funding mechanism, as Congress’ Joint Committee on Taxation in 2013 estimated the tax would raise $29 billion over a decade.

ResMed, a company that makes devices for sleeping disorders, works with the Advanced Medical Technology Association and other policy groups to oppose such measures, David Pendarvis, the company’s chief administrative officer and global general counsel, said in a statement.

“It’s an arbitrary tax on one health care sector, and it threatens America’s overall leadership in medical technology: harming job creation in San Diego and other medtech hubs, increasing the cost of health care and deterring the research and development necessary for innovations that reduce the human and economic burden of disease,” Pendarvis said.

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