Manufacturers Marshal Forces to Battle $40 Billion Tax

WASHINGTON — Medical device manufacturers, including those
in the home medical equipment sector, are mustering forces to
combat a proposed excise tax on their products, saying it could
impede research and development, cost jobs and increase the cost of
health care.

The Senate Finance Committee is proposing the tax as a “pay for”
in its $856 billion health reform package. The committee’s bill
calls for device makers to pay $40 billion in fees over 10 years,
with payments varying based on each company’s market share.

Why $40 billion?

“Basically, there is a $4 billion-per-year hole that the medical
device manufacturers would be responsible for filling,” explained
Cara Bachenheimer, senior vice president, government relations, for
Invacare
Corp. The Elyria, Ohio-based company is the largest home
medical equipment manufacturer in the nation.

But siphoning the fees out of a home care sector already being
sucked dry through competitive bidding, a 36-month oxygen rental
cap, elimination of the first-month power wheelchair purchase
option (also included in the Senate proposal) and a 9.5 percent DME
cut that took effect Jan. 1 would be disastrous, stakeholders
said.

“This is a triple hit with the first-month purchase option
elimination, competitive bidding and now this,” said Seth Johnson,
vice president, government affairs, for Pride Mobility Products in
Exeter, Pa. “You add an additional cost to the health care system
and it is going to increase costs [to consumers].”

Walt Gorski, vice president of the American Association for Homecare,
agreed. “Not only is it a tax on manufacturers, but the only
realistic way for manufacturers to react is to … pass the
cost of the tax to providers,” he said. “So providers are, quite
frankly, being squeezed from the reimbursement side and the cost
side. We think that is an untenable situation.”

AAHomecare joined 42 other organizations representing hundreds
of medical device and diagnostics manufacturers across the nation
last week in sending a letter decrying the proposal to Sen. Max
Baucus, D-Mont., chairman of the Senate Finance Committee, and Sen.
Charles Grassley, R-Iowa, ranking member.

The proposed tax would “ultimately have a negative effect on
patients, health care providers, and consumers, as it increases the
cost of health care,” the letter read. “We ask you to eliminate
this proposal from consideration.”

Squeeze Play

The proposed tax caught HME stakeholders by surprise when it
surfaced, first in the Senate Finance Committee’s framework for health
reform, and then in more definitive language in the “chairman’s
mark.” Baucus released the latter, a version of the committee’s
proposed health reform legislation, on Wednesday in advance of the
full committee markup of the draft legislation. The markup could
begin as early as Tuesday.

As proposed, the tax would be levied on anyone who manufactures
or imports medical devices offered for sale in the United States. A
medical device would include Class 2 and Class 3 products as
defined by the FDA, which would encompass all power wheelchairs and
oxygen, as well as other HME. It would not include Class 1 items,
such as canes, crutches and walkers.

Each entity’s portion of the tax would be based on its relative
market share of covered domestic sales for the prior year. Firms
with sales up to $5 million would be exempt from the tax. For those
companies with sales of $5 million to $25 million, the tax would be
levied on 50 percent of sales; for those with sales of $25 million
or more, it would be assessed on 100 percent of sales.

Bachenheimer said Invacare began studying the proposal when it
first arose in the framework released earlier this month and
quickly became concerned about its potential impact. The company
sent a letter to Ohio’s senators, Republican George Voinovich and
Democrat Sherrod Brown, expressing its opposition and detailing the
potential consequences of the tax.

“Hundreds of Ohio jobs will be lost as Invacare would be forced
to restructure,” wrote Invacare Chairman and CEO Mal Mixon. In
addition, he said, profits and R&D would be eliminated.

“If this tax goes into effect, it will penalize manufacturers
who are at the forefront of research and development,” Mixon wrote.
“Invacare’s research and development is 1.5 percent of sales. In
the first six months of 2009, Invacare’s net earnings margin on a
GAAP [generally accepted accounting principle] basis was 1.2
percent of sales. This new tax of over three percent will severely
damage our ability to bring new products to market that enhance
people’s quality of life. In other words, this 3.1 percent tax from
sales becomes a 100 percent tax on Invacare’s earnings and R&D
investment.”

Mixon also noted that the tax would raise health care costs,
since much of the cost of the tax would be passed on to
patients.

“It does not make sense to finance health reform by taxing
countless products that patients require,” he wrote. “Bearing the
burden of an acute illness or chronic condition is costly enough;
the additional financial penalty on these same patients seems
unjustified.”

And there are additional questions about the tax, Bachenheimer
said.

“We have some questions that haven’t been answered,” she said.
“If you are a foreign-based company and you sell medical devices in
the U.S., I am not sure the IRS has the authority to tax you.
That’s one of the big questions we have. We are not confident that
the authority exists or the ability exists to reach those
people.”

Another question has to do with verification of actual sales of
private companies and importers. Public companies such as Invacare
must report their sales, Bachenheimer noted, but “there are scads
and scads of importers and other manufacturers that are not public
companies.” Those companies would be required to report their sales
to a public agency and their tax liability would be figured on that
report, but there is no provision — in the mark, anyway
— as to how those figures would be verified.

All of this could change as the markup proceeds, Bachenheimer
said.

“We expect Sen. Baucus to start the markup on Tuesday, and that
means we would have draft language. I am sure there will be
changes, more details, surprises,” Bachenheimer said.

That also means there is an opportunity to get the tax
eliminated from the final proposed bill, she said, and “there are
very large companies working on this in Washington, like Johnson
& Johnson and Hill-Rom. It’s not just our industry,”
Bachenheimer said.

“That’s why the advocacy efforts on these issues must continue,”
added Johnson. “It’s even more important now that Congress is fully
engaged in getting health care reform through. We need to make sure
we are fully engaging clinicians and all stakeholders in carrying
the message to Capitol Hill.”

Gorski said AAHomecare is working with its manufacturer members
to seek alternatives to the excise tax, but the aid of all
stakeholders is vital.

“We consider the Senate Finance package, including the excise
tax, a danger to the entire HME community,” he said. “The Senate
proposal should be a very clear warning and should be a unifying
event … The HME community has shown its ability to rally and
muster its forces to address its concerns on Capitol Hill. We need
to do so again.”