Tax on medical devices takes toll on area companies


Machinist John Patak creates fin trays used in knee products at Exactech Thursday, October 17, 2013.

Doug Finger/The Gainesville Sun
Published: Sunday, October 20, 2013 at 6:01 a.m.
Last Modified: Saturday, October 19, 2013 at 10:51 p.m.

Several area companies with millions of dollars at stake watched the recent budget and debt negotiations in Washington with interest as the repeal of a tax on medical devices was one of the last remaining bargaining chips played by Republicans seeking concessions — any concession — to the Affordable Care Act.

After all, the companies say the 2.3 percent tax on sales that started on Jan. 1 has already cut into their ability to hire employees and invest in product marketing and development.

In the end, with Senate Majority Leader Harry Reid wresting bargaining power from the House on the eve of a federal debt default, Congress ended the partial-government shutdown and extended federal borrowing limits with the Affordable Care Act and its medical device excise tax intact.

But the Medical Device Manufacturers Association says it has not given up the fight. The trade group estimates that the tax will cost the industry 43,000 U.S. jobs if it is not repealed, though others dispute that.

The Republican-controlled House has voted several times to kill the tax, with support from some Democrats in states with a lot of medical device manufacturers. Earlier this year, the Senate approved a nonbinding budget resolution with 79 votes that included a provision to kill the tax.

“The rub is there are a handful of senators in leadership who do not want to give a real up-or-down vote. They believe it's hostile to Obamacare, hostile to their overall agenda,” said John Ray, executive director of the Florida Medical Manufacturers Consortium (FMMC).

Ray said Florida is disproportionately hurt by the tax. The percentage of the state's economy made up of manufacturing is half of the national average, but the state is a leader in medical device manufacturing, with the third-most companies and the fifth-most employees in the nation, he said.

The FMMC counts 528 medical device manufacturers in the state with more than 20,000 total employees. And most of the manufacturers are small, with 85 percent having 25 employees or fewer, Ray said. Those are the companies most hurt by the tax since they operate with very small margins, he said.

It's not just the tax itself that hurts small companies, he said, it's the time and expense of accounting and compliance.

“It's a really poorly constructed tax because it doesn't provide any provision for the small guys,” Ray said.

Several medical device manufacturers are included among the cluster of biotech companies in Alachua County. Those that sell medical devices to health care providers pay the tax. The tax does not include over-the-counter devices purchased directly by consumers. It also does not include pharmaceuticals or products made from human cells and tissue, which make up a large part of the area biotech market.

And many area companies are considered pre-revenue — still in development and marching toward FDA approval before sales can begin and before they are subject to being taxed.

David Day, who is in touch with many of the companies as director of the University of Florida Office of Technology Licensing, said he has not seen the tax affecting investments into medical device companies, though he has seen a recent shift in attention from devices to diagnostics.

Exactech has been leading the charge locally against the tax. Of 144 people in Alachua County to sign an online petition at no2point3.com, 97 work for the bone and joint restoration product manufacturer. The company has met on two occasions with U.S. Rep. Ted Yoho, R-Gainesville, and before that with his predecessor in Congress, Cliff Stearns of Ocala.

Jody Phillips, chief financial officer at Exactech, projects that the tax will cost the company $1.6 million this year and $1.9 million in 2014. That amounts to about 12-15 percent of the company's net income, or profit, Phillips said.

Exactech reported $224 million in revenues in 2012 and net income, or profit, of $12.7 million.

The company, which employs more than 600 people worldwide and more than 400 in Gainesville, planned to hire 45 people this year but probably will hire closer to 20 as a result of the added cost, Phillips said.

Exactech CEO Bill Petty said that has ripple effects throughout the company. Fewer new engineers means the company is not able to progress as quickly on developing new products that improve patient mobility. It means it is not able to do as much in marketing and sales.

“That's kind of the effect on Exactech specifically. You can multiply that by medical device companies in the area, Florida and all over the country,” he said.

Phillips said he is not optimistic the tax will be repealed without a way to replace the $30 billion the tax is expected to raise over 10 years to help pay for patient subsidies.

RTI Surgical of Alachua expects to face more of a tax hit after expanding beyond implants made from human donor tissue to more metal and synthetic implants with its recent acquisition of Pioneer Surgical.

Based on its combined sales of the past 12 months, the company is estimating that the tax will cost it $2 million.

Spokeswoman Wendy Crites-Wacker said RTI will have to offset that by curtailing investments in research and development, infrastructure and staffing.

Among smaller companies, Alachua-based AxoGen is in a similar situation in that its flagship nerve-repair product is made from human tissue and is not subject to the tax, but it is also a distributor for synthetic nerve protection devices that are taxed.

The manufacturer, Cook Biotech, passes the costs on to AxoGen, and AxoGen passes the cost on to hospitals, which then charges that to patients, AxoGen CEO Karen Zaderej said. That would run counter to one of the stated tenets of the Affordable Care Act — that it will lower costs to consumers.

“I think it's naive to think these raised costs for manufacturers don't translate into some cost impact to the patient,” Zaderej said.

Of bigger concern for her company is the cost of the ACA requirement to report every transaction to health care providers of $10 or more or $100 a year, under every provider's medical license in every state. To offset that, AxoGen has raised prices in some cases and in some cases cut costs, she said.

Such costs have a bigger impact for a young company that still is investing more than it makes. AxoGen reported $2.86 million in revenues in the second quarter but reported a net loss of $3.45 million.

“It really comes down to us looking at things we're just not going to do — studies I'd like to do on products, product development things we'd like to do,” Zaderej said.

That's the downside of the Affordable Care Act, Zaderej said. The upside is more potential business from a projected 30 million newly insured people, which was one of the arguments for taxing medical device manufacturers and other industries that could see more business.

“There are many indigent patients who have traumatic injuries who come into hospitals and get care but may not get the best care,” she said. “With insurance, we're hoping they're offered options they in the past were not offered, so we hope there's an increase in business from that respect.”

However, Exactech and others in orthopedics are not expecting a bump, Phillips said, since so many bone and joint replacement patients are older people who already were covered by Medicare.

“That's probably the most disappointing thing about all this, is the justification behind the tax is we were going to get all this new business,” he said.

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