Many in the medical device sector industry say promising companies are likely to move offshore or reduce their operations to weather a 2.3 percent excise tax on revenues that took effect Jan. 1 and wasn’t part of the congressional fiscal-cliff deal.
The tax is “incredibly punitive,” said John Ray, executive director of the Florida Medical Manufacturers Consortium. “It targets one of the most successful sectors in our country.”
The first installment on the tax is due in late January for firms that owe more than $2,500 in quarterly taxes, the Internal Revenue Service said.
The tax applies to any medical devices regulated by the FDA, which is wide-ranging, including braces, MRIs, CAT scans — anything not available through retail, according to Brendan Benner, vice president of governmental affairs for the Medical Device Manufacturers Association in Washington, D.C.
The tax would amount to $230 on the sale of a $10,000 medical device. While that may seem small, opponents say it has a larger impact because it is a tax on sales — not profits. The tax could result in less spending on research and development and lead to job cuts, medical device companies say.
“The biggest issue for medical device industry is the excise tax — 2.3 percent tax on sales, not on net income — to companies like Mako,” said Dr. Maurice Ferre, founder and chief executive of Mako Surgical, a Davie, Fla., maker of surgical systems used for knee and hip replacement procedures.
The company added a second production line in 2011, but Ferre said the tax will have an impact on the ability of medical device companies to do research and development and create jobs. Mako had 400 employees in 2011 and was on track to hire another 90 in 2012.
Jeffrey Binder, CEO of Biomet, which employs 400 at its Biomet 3i dental implant company in Palm Beach Gardens, Fla., blogged about the tax issue as early as 2009, when Congress was weighing health care reform: “The tax would create the worst of all possible situations: escalating costs on the newest technology and reduced capital to invest in jobs and R&D.”
Biomet said it continues to work for a repeal of the tax because it is “ill-conceived and counter-productive.” The tax “will require medical device companies to evaluate all their discretionary spending, including R&D and hiring,” the company said.
The tax is part of the Affordable Care Act, designed to raise money to cover the uninsured. The White House has said that medical device industry, like other health care businesses, will benefit from an additional 30 million potential consumers who will gain health coverage under the law starting in 2014.
But Ray said most of those new customers for health care will be young, not in need of knee and hip replacements.
There was hope among some in the industry that a repeal would be part of the year-end fiscal cliff negotiations. The Florida Medical Manufacturers Consortium sent letters to Sens. Marco Rubio and Bill Nelson of Florida, urging them to take action. The medical device tax, the consortium wrote, will consume “65 percent of a typical company’s profits.”
Allen Craig, board member of the Florida Medical Manufacturers Consortium, said he expects larger companies will seek lower costs offshore, operating perhaps in Costa Rica or Europe.
“Big companies have flexibility. They’ll try and save as much as they can,” he said.
Craig, Florida sales manager for Interplex Sunbelt, a medical device component manufacturer with 95 employees in Tamarac, Fla., said his company has international operations and expects an uptick in business as result of some businesses moving offshore.
But Craig still would like to see the tax repealed, saying it effectively equates to a 30 percent income tax hike for medical device firms, on top of their corporate tax rate. Some medical device firms could end up paying 54 percent to 60 percent of their income in taxes, he said.
As a result, “you’re going to see investment dollars move out of the country,” he said.