WASHINGTON — B. Braun Medical and other makers of medical devices cried foul over a 2.3 percent tax imposed on their industry by Obamacare, saying it could force them to cut jobs, move overseas and stop growth.
Seven months since its implementation, the companies largely have absorbed the tax without cutting profits or passing along costs to consumers, independent analysts say. Instead, the industry has used layoffs, frozen salaries, restructuring and other cost-reduction methods to mitigate the pain.
Industry groups and local manufacturers, like B. Braun and Olympus, continue to press hard for repeal of the tax. They've succeeded in convincing Democrats that represent them, ones who voted for the health care law, to support their effort.
"The general consensus has been … the companies, at least the larger ones, are offsetting it through restructuring programs to retain levels of profitability to maintain where they are now," said Bloomberg Industries medical device analyst Jason McGorman.
St. Jude Medical, for instance, a $14.7 billion Minnesota-based company that makes heart devices, in August 2012 laid off 300 employees to reduce pre-tax operating costs by $50 million, or about what it must pay in new taxes. And Stryker, a $26.6 billion Michigan-based company that makes orthopedic implants, cut more than 1,000 jobs to make up for the $100 million it would pay in the new sales tax.
B. Braun, the Lehigh Valley's largest manufacturer and eighth-biggest employer, absorbed the cost by freezing hiring and raises, and by cutting research and development, senior vice president Bruce Heugel said.
The German company, which is private and does not disclose its total worth or profit margins, will pay an extra $20 million this year in taxes, Heugel said. "We've wired millions to the federal government, so I have to take it from someplace," Heugel said. "This isn't a small tax, it's a huge tax."
While larger companies have taken steps to maintain profits in the face of the tax, small businesses, which make up most of the medical device industry, have no where to cut from.
"Where it is a little more onerous is with the smaller companies," said Matt Taylor, a medical device analyst with Barclays Bank in New York. "It is a tax on sales, if you're a growing company that isn't making a profit, that could be harder to offset."
AdvaMed, the DC-based trade association for the medical device industry, in July announced that U.S. companies had paid $1 billion because of the tax, which is projected by Congress to bring in $1.7 billion in revenue during 2013 and $30 billion over 10 years.
The tax applies to all medical devices, from bedpans to pacemakers, but not to "over-the-counter" items like contact lenses or hearing aids.
The levy is one of many ways Congress had the health care sector help cover the cost of the 2010 Affordable Care Act, commonly known as Obamacare. The tax is justified, proponents said, because as millions more Americans receive health insurance under the law, sales of medical devices also will grow. Further, they said, the industry was profitable enough to absorb the additional tax without too much pain.
"Thanks to the health care law, this industry will continue to thrive due, in part, to their access to an expanded customer base for medical devices," the White House said.
The medical device industry continues to oppose the tax, and spent more than $30 million last year lobbying Congress on it and other issues, according to data from Opensecrets.org.
From the start Republicans also opposed the tax, as GOP lawmakers have with virtually all facets of Obamacare. Now more Democrats are calling for its repeal, especially in states like Pennsylvania, which is the fourth largest supplier of medical devices in the country, according to Pennsylvania Bio, a state-based organization promoting biotechnology and medical devices.
According to Pennsylvania Bio membership, there are 177 medical device developers and manufacturers in the state, and seven are located in Lehigh and Northampton counties. They include larger companies B. Braun and Orasure, both in Bethlehem, as well as several startups located at Ben Franklin Technology Partners.
There are a handful of other companies subject to the tax that are not on Pennsylvania Bio's membership list, including Olympus America Inc. in Center Valley and Boas Surgical in Allentown.
U.S. Sen. Bob Casey, D-Pa., and U.S. Rep. Allyson Schwartz, D-13th District, a candidate for governor, are among the Democrats pushing to end the tax, although neither has specifics for how to recoup the lost tax revenue to pay for the overall health care law they support.
In 2012, a political action committee for the leading medical device trade association gave Casey $3,000 and Schwartz $4,000 for their re-election campaigns. Republican Sen. Pat Toomey of Pennsylvania and Rep. Charlie Dent of the Lehigh Valley, among the most vocal opponents of the tax, received $1,000 each from the Advanced Medical Technology Association [AdvaMed] PAC.
In March, the Senate voted 79-20 to repeal the medical device tax. There is pressure in the House to do the same. Legislation to do away with the tax has 260 cosponsors, including Schwartz and every Pennsylvania Republican congressman.
In late July, Casey toured Olympus Medical Learning Center in Center Valley, where he discussed the tax with Olympus President Luke Calcraft. The local subsidiary of the Tokyo-based $9 billion corporation employs just under 1,000 in the Lehigh Valley.
Calcraft, in a statement, said the company, which makes endoscopes among other medical and surgical products, has been able to absorb the tax without raising product costs or layoffs. But he suggested it's robbing the company of money that could be invested in growing the business — a lobbying theme being advanced by the industry.
Calcraft noted the tax is "particularly punitive to small, innovative device manufacturers," a point echoed by analysts.
The majority of medical device companies in the country are small startups developing one specialty product. The tax is paid on invoices, not when the company is paid, so the small businesses already operating in small profit margins often pay the tax before getting money for the sale, said James Manser, Pennsylvania Bio's vice president of policy.
Bruce Shook, CEO of Neuronetics in Malvern, Chester County, said his 130-employee business is growing, but not yet profitable. The company makes stimulative brain technology to treat people with depression for whom drugs did not work. Shook said he's already paid several hundred thousand dollars to the federal government in the new tax. Neuronetics is a private company that does not disclose its finances.
"It's as if our manufacturing costs went up 2.3 percent. That means there is less money available for product development. It's very real money and I think there is a fallacy that there are plenty of profits to go around in the industry, a lot of us are not profitable," Shook said. "We don't have the luxury of putting less money into the bank, it has to come out of operations, out of what we're doing inside the company."
Steve Ubl, CEO of AdvaMed, portrayed the tax as just another hindrance in an already difficult economic environment: Federal Drug Administration regulations make it difficult to bring new products to market. Hospitals are bargaining for lower prices on devices. And the fragile economy also means people are putting off certain elected surgeries, which means devices are used less.
Paul Van de Water, an economist with the left-leaning Center for Budget Policy and Priorities, said the medical device industry exaggerates the pain.
"We don't levy taxes for the sake of levying taxes, we levy them for things worth paying for. This was imposed to help pay for health reform, I think that's a very worthwhile activity," Van de Water said. "Like any tax there will [be] negative effects, but I think they are likely to be small and the arguments overblown."
Van de Water pushes back against claims by the medical device industry that the newly insured will not translate to more medical device sales. The device industry argues that those who are currently uninsured are largely young and healthy, and therefore less aggressive users of the health care system. For that reason, the industry doesn't anticipate new revenue when those people obtain health insurance.
Barclay's Taylor wrote a report in June analyzing whether more insured Americans would create a windfall for medical devices. He concluded that increases in health care use would add, at most, 1 percent in revenue in the medical device industry in 2014 — when Obamacare is just getting off the ground.
The so-called health care exchanges, the program run by the government as a one-stop shop for uninsured Americans to purchase more affordable care begins on until Oct. 1, so it may not be possible to measure the impact the health care law has on the industry for several years.
Taylor projects hospital revenue under the health care law will continue to rise incrementally in subsequent years, which could lead to increased sales for devices, but added that many variables make it difficult to know for sure.
Still, the device industry and the lawmakers with companies in their districts pledge to continue pushing a complete repeal of the tax. Some, including Dent, have suggested using it as a bargaining chip in the looming battle this fall over raising the nation's debt limit.
Medical device firms in Lehigh Valley
Local manufacturers and developers of medical devices.
•Aesculap – Center Valley
•Arista Biologicals – Allentown
•B. Braun – Bethlehem
•Boas Surgical – Allentown
•Cerora – Bethlehem
•Glucolight Corp – Bethlehem
•HoverTech International – Bethlehem
•LifeServe Innovations – Bethlehem
•Machery and Nagel, Inc. – Bethlehem
•Medico International Inc – Easton
•Neuromonics Inc. – Bethlehem
•Olympus America Inc. – Center Valley
•Orasure Technologies – Bethlehem
•Precision Medical – Northampton
•Saladax Biomedical – Bethlehem
Source: Pennsylvania Bio, U.S. Rep. Charlie Dent officeCopyright © 2014, The Baltimore Sun