HME Manufacturers Rally to Fight Medical Device Tax

ATLANTA — As congressional negotiations escalate on a
final health care reform package, manufacturers continue working to
blunt the effects of a proposed excise tax on medical device
manufacturers.

“We’re doing everything we can to modify or moderate the impact
of this tax — if we can’t get rid of it entirely,” said Seth
Johnson, vice president of government affairs for Pride Mobility
Products, Exeter, Pa.

Included in both the House and Senate bills, the tax would raise
$20 billion over 10 years to help pay for health care reform. That
could mean millions of dollars in annual costs for manufacturers no
matter which version ends up in the final legislation.

The House bill includes a flat tax that would be implemented in
2014 based on 2013 gross sales. The Senate version calls for a
percentage calculated on each manufacturer’s gross sales, with
collection beginning in 2011 based on sales from 2010.

“It provides no time for manufacturers to plan,” Johnson said of
the Senate measure. “We have no idea what that percentage amount
would be. If the Senate bill is enacted, [the tax] would be
retroactive to Jan. 1 this year. That would require significant
expense to our company that was not planned for. It would require
some significant restructuring.”

That huge unknown has already prompted Elyria, Ohio-based
Invacare to begin saving now should the tax become a reality. The
HME manufacturer, which has estimated the tax could cost the
company $12 million to $14 million annually, recently suspended
merit increases, matching contributions to its 401(k) and froze
hiring.

In a filing with the Securities and Exchange Commission, the
company also said it was evaluating the possibility of price
increases, shifting more production overseas and reducing research
and development expenditures. (For more, see Invacare Institutes
Hiring Freeze, Suspends Merit Raises, Jan. 14.)

“It’s a significant impact,” said Cara Bachenheimer, senior vice
president of government relations for Invacare, about the tax. “We
don’t know what version is going to pass or if it is going to be
some combination. This is a big deal.”

“We are very concerned about the effect [of a tax] on the home
medical equipment sector,” added Jay Witter, senior director of
government affairs for the American Association for Homecare, which
held a Jan. 13 conference call with its manufacturer members on
fighting the tax. The association’s arguments:

• American jobs will be lost. The tax would be based on sales of
  domestically produced medical devices, so it could propel U.S.
  manufacturers to move production overseas.

• Universal health care coverage will not increase sales for the
  HME industry. “One of the concerns we talked about [on the
  conference call] is that we feel there won’t be an increase in
  volume for manufacturers because of increased access,” Witter said,
  adding that proponents of the tax claim that with universal health
  coverage, more people will have access to HME. “Manufacturers
  provide equipment to Medicare beneficiaries already,” he pointed
  out. “There aren’t going to be more Medicare beneficiaries because
  of health care reform.”

• Profits, research and development will be eliminated.
  “Unfortunately, the excise tax applies to medical device sales
  regardless of whether those devices represent the latest technology
  or older technologies,” AAHomecare said. “Moreover, many medical
  technology innovations come from smaller undercapitalized
  companies. If this tax goes into effect, it will penalize
  manufacturers who are at the forefront of research and
  development.”

Another argument, Johnson said, is that the tax would “translate
into increased costs throughout the health care continuum, which is
contratry to the underlying primary goals of both the
administration and Congress. The president linked health reform to
building the economy and creating jobs,” he continued, but the
excise tax would do just the opposite.

“Right now, it appears [the tax] will be in the health reform
bill in some form or other,” continued Johnson, noting that
Congress is intent on saving immediate dollars. “From our
perspective, the Senate version would be much more onerous” because
it allows companies no time to plan and is predicated on an unknown
percentage.

Johnson said he made that case recently to Sen. Robert Casey,
D-Pa., who indicated he would push at least for moderating the
impact of the tax. “If this tax has to be included, then [they]
absolutely have to push out the implementation date similar to the
House so companies can plan now how they are going to move forward
in an appropriate manner to absorb this cost,” Johnson said.

He said the tax could be part of a devastating “triple hit” if
the first-month purchase option for power wheelchairs is eliminated
and competitive bidding is expanded as currently proposed in the
Senate health reform package.

Trickle-Down Effect

There is no doubt that such a tax would have a trickle-down
effect, something that concerns providers as well.

Jim Greatorex of Black Bear Medical in Portland, Maine, said he
expects providers would have to shoulder greater costs for
products. “When we hear from Invacare that the tax is going to
basically wipe out their net profits, I don’t see anywhere else for
that to go,” he said. “I am sure they will find some efficiencies,
but there will be some cost-shifting. There has to be.”

Scott Lloyd, president of Norcross, Ga.-based Extrakare, told
HomeCare in a recent interview that he’s concerned about
the tax because he fears it may propel manufacturers to curtail
their financing programs for providers. “Our business to a large
degree is dependent on manufacturers’ financing plans,” he said.
“If they have losses in financing, that is going to impact our
ability to grow.”

Johnson acknowledged that could indeed be the case. “Access to
capital would be more challenging,” he said.

Stakeholders have a narrowing window of time in which to work
against the tax. Last week, President Obama and members of Congress
met in intense negotiation sessions to hammer out key areas of
disagreement and get the health reform package moving through
legislative channels. The increasing momentum means agreement on
the legislation could come any day.

“We have no idea about the timeline. There could be a deal
today. It’s not very predictable; it could happen very quickly or
it could drag out,” said Witter on Friday.