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VOL. 124 | NO. 236 | Wednesday, December 2, 2009

Health Care Legislation Could Affect Local Medical Industry

By Tom Wilemon

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Medical device makers will pick up a $20 billion tab to help cover the cost of insuring more Americans under legislation pending in Congress to overhaul the health care system.

That’s half of what was originally proposed in the bill put forth by Senate Majority Leader Harry Reid, D-Nev. Even so, industry executives are keeping a close watch on the legislation. It could have an impact on the Memphis economy where thousands of people work for Medtronic Inc., Smith & Nephew, Wright Medical Group Inc. and several smaller companies that manufacture orthopedic products and other medical devices.

“Everyone is aware of the concerns, and everybody would prefer not to pay an additional excise tax,” said John D. Bakewell, chief financial officer for Wright Medical. “We’ll see where the legislation all shakes out.”

Wright Medical and other companies are coordinating efforts to help shape the legislation through the Advanced Medical Technology Association (AdvaMed).

The association called for the elimination of a $40 billion tax that was in the bill put forth by the Senate Finance Committee in October. Last month, it expressed appreciation when the full House of Representatives passed a bill that limited that tax to $20 billion, but stated concerns about other provisions. The $40 billion and $20 billion figures are cumulative totals for how much the taxes on medical devices would generate over a 10-year time frame.

Two weeks ago, Reid, revised his bill to put the tax in line with the House legislation. Debate began this week in the full Senate for what type of health care reform bill it might pass.

The tax issue is far from being resolved. The full Senate still has to pass its version of health care reform. If it does, the differences between the Senate and House bills would have to be ironed out, and then both chambers would have to approve the compromises of a conference bill.

Protecting the little guys

Any tax could harm startup operations more than established companies. Stephen J. Ubl, chief executive officer of AdvaMed, has called on Congress to protect smaller players in the medical device industry. These startup companies are often at the leading edge of new innovations.

“Small manufacturers with less than $100 million in annual gross receipts should be exempted from the tax, perhaps through a rebate mechanism,” Ubl said in a statement.

The tax proposals would not penalize domestically made products, said Wanda Moebius, vice president of policy communications for AdvaMed.

“The tax applies to devices made outside of the U.S. and imported into the country as well as those made here,” she said. “The legislation imposes a tax on each covered entity that is manufacturing or importing medical devices offered for sale in the U.S.”

There is hope that smaller companies would be saved the burden.

“We’re very much hoping that the tax – if there is a tax – that it would be set up in a way that protects small companies so that they can continue to drive medical innovation and employment,” Moebius said. “Small companies are huge drivers of jobs in this country. In order to grow from a small company to a large company during periods of development, they need to be protected.”

More costs

There are other costs for medical device companies. Bill Hawkins, the chief executive officer of Medtronic, said concessions made by hospitals as part of the health care overhaul are estimated to wind up costing the medical device industry about $15 billion through payment agreements. Along with savings for the government achieved through value-based purchasing and other initiatives, the cost to the industry could exceed $20 billion before any taxes are issued, he said.

“The Senate Finance Committee originally proposed a $40 billion manufacturer’s fee assessed over the next 10 years, which would have brought our total industry contribution to more than $60 billion,” Hawkins said in a statement he issued after Reid reduced the proposed tax. “The adverse impacts of such an ‘innovation tax’ are real and directly affect our ability to carry on vital research and development activity, provide jobs and to remain globally competitive.

“In real terms, the proposed $40 billion manufacturer’s fee would have meant nearly $300 million of additional annual costs to Medtronic’s business alone. With this additional burden, the United States would become the most expensive country in the world to develop and produce medical technology.”

Ironing out differences

Although the full House bill and the Senate Finance Committee bill are estimated to generate about $20 billion, there are differences between them. The tax would start being assessed in 2010 with the Senate Finance Committee bill, but the House bill would delay it until 2013.

With the Senate Finance Committee bill, the tax is based on a company’s prior year’s reported sales share. The scale of the tax also differs according to the type of medical devices a company makes.

The House tax is a straight 2.5 percent tax on medical devices, with the manufacturer paying it for complex devices and the wholesaler paying it for simple devices, such as wheelchairs.

Steven Broderick, communications director for U.S. Rep. Steve Cohen, D-Memphis, said consumers will not have to pay the tax.

“The concern that Congressman Cohen had in particular was he didn’t want the medical device tax passed on to ordinary consumers, which would have been in the original proposal,” Broderick said. “If you had gone and purchased a wheelchair, you would have had to pay a tax on it. The way the proposal now reads, the ordinary consumer, the end user, will not pay anything. But wholesale users, such as hospitals and so forth, will pay a small, modest, refined tax on medical devices.”

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