Return of medical-device tax dismays firms across state

January 5, 2018
Cook Medical—which makes hundreds of devices, from catheters to dilation balloons—said the tax suspension “was critical” in allowing it to invest in new products and systems. (IBJ file photo)

Indiana corporations, from huge manufacturers to small accounting firms, will get a tax cut this year under the Republicans’ sweeping tax overhaul. But one industry employing 17,000 Hoosiers is bracing for a large tax increase.

The medical-device industry will see a resumption of the 2.3 percent federal excise tax beginning this month, following a two-year moratorium that expired Dec. 31.

device-tax-numbers.gifThat means companies that make thousands of medical devices, from stents and catheters to MRI machines and artificial joints, will start making tax payments that could cost some large device makers—such as Cook Medical of Bloomington and Zimmer Biomet of Warsaw—tens of millions of dollars a year.

Indiana is home to 155 device-makers, ranging from small metal shops to multibillion-dollar manufacturers. The sector has a combined annual payroll of $1.5 billion, according to the Indiana Medical Device Manufacturing Council.

The tax is levied on devices sold to health care providers. Consumer goods, such as tissues and bandages sold in drugstores, are not subject to the tax.

The tax originally was imposed in 2013 as one of several taxes and fees in the Affordable Care Act that pay for expanded health insurance under the law. It was suspended for two years, beginning in 2016, after a large outcry from device makers, which said it put a drag on finances and hurt innovation.

The industry lobbied heavily last year for Congress to continue the suspension, or to repeal the tax altogether. But various GOP efforts to repeal the Affordable Care Act and the taxes associated with it failed, and the sweeping federal tax overhaul recently signed by President Trump didn’t eliminate the medical-device tax, either.

Now, some Indiana device makers are protesting that a resumption of the tax will eat into money that could have been spent on developing new products, building new factories and creating new jobs.

Hill-Rom Holdings Inc., a maker of hospital supplies for wound care and respiratory health, estimates it saved $40 million over the past two years when the tax was suspended, much of which it invested in modern technologies, such as vision-screening devices and high-tech hospital beds that can automatically monitor a patient’s vital signs.

strobel-steve-mug-accountant Strobel

“We’ve got a raft of innovations we’ve been able to put into the market,” said Steve Strobel, Hill-Rom’s chief financial officer. The company, which moved its headquarters from Batesville to Chicago in 2015, still employs hundreds in Indiana.

Had the tax remained in place, he said, Hill-Rom “would have had to make some tough choices” on which new products to delay or scrap.

Cook Medical, which makes hundreds of devices from catheters to dilation balloons, said the tax suspension “was critical” in allowing it to invest in new products and systems. Now, reinstatement of the tax means medical-device makers will see their federal taxes rise an average of 30 percent, whether or not the company is profitable.

“If Congress doesn’t act quickly to address this tax, medical-device companies will feel the impact on innovation that this tax creates before the end of this month,” said Allison Giles, Cook’s vice president for federal and international government affairs

Industry groups, including the Advanced Medical Technology Association and the Medical Imaging & Technology Alliance, warn the tax will take a $20 billion bite out of the industry over the next decade.

But there are signs that Congress could take another look at the issue. The next attempt could come about through a spending bill needed by Jan. 19 to avert a government shutdown.

Last month, several members of the House, including Rep. Jackie Walorski, R-Elkhart, introduced legislation to suspend the tax for another five years.

The bill has not come up for a vote yet, but Walorski’s office sounded optimistic the measure would get another look in coming weeks.

“Congresswoman Walorski is confident Congress will take action soon to provide relief from the job-killing medical-device tax,” said her spokesman, Jack Morrissey, in an email.

Many industry advocates said they support the additional suspension.

telthorst-george-mug-college-exec Telthorst

“It’s not as good as just killing it off, which was the original hope, but it’s a step in the right direction,” said George M. Telthorst, director of the Center for the Business of Life Sciences at the Indiana University Kelley School of Business in Bloomington.

Sen. Joe Donnelly, a Democrat from northern Indiana, and Sen. Todd Young, a Republican from southern Indiana, both favor a suspension or outright repeal of the medical-device tax. So do many of Indiana’s House delegation.

One factor that could help: The nation’s $150 billion medical-device industry has large concentrations in Democratic states, such as Minnesota, Massachusetts, Illinois and California, along with traditionally Republican states, such as Indiana and Florida.

carmichael-jeffrey-mug-lawyer Carmichael

That could translate into a bipartisan push for a bill to further suspend or kill the tax, said Jeffrey L. Carmichael, a tax lawyer at Hall Render Killian Heath & Lyman, an Indianapolis law firm that specializes in the health care industry.

“There are people on both sides of the aisle that would like to see this happen,” Carmichael said.•

– The Associated Press contributed to this story.




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