Tax Unites Medical Device Industry And Minnesota’s Lawmakers

The repeal or delay of the medical device tax is a top legislative priority for Representative Erik Paulsen.

WASHINGTON — For about six hours last Tuesday, it looked like House Republicans would take another stab at Minnesota Representative Erik Paulsen’s top legislative priority: repealing or delaying the tax on medical device sales under President Obama’s health-care law.

Their effort petered out that night, and Republicans would eventually accept a short-term government funding bill with hardly any GOP demands included. But Paulsen and tax repeal advocates say they see an opening, and, more importantly, momentum for repealing the 2.3 percent tax that is expected to bring in $30 billion to fund Obamacare over the next 10 years.

“So many people are aware of it because it’s been in the news so often, it’s going to be right there again when we’re talking about the budget issues again in two and a half months,” Paulsen said.

Device industry groups say the tax, which has brought in about $2 billion in new revenue so far this year, is stifling innovation and growth across the board. Tax supporters have dismissed the concerns, at least for large companies like Medtronic, while admitting the tax—levied on revenue as opposed to profits—might be squeezing small device companies.

“The 10 largest manufacturers have 86 percent of the sales covered by the tax,” said Topher Spiro, an analyst for the liberal Center for American Progress and a former congressional staffer who helped write the Affordable Care Act. He dismissed full repeal efforts, but said, “I think the tax could be even better targeted than it is. The big guys can definitely afford it.”

Lawmakers' focus has been either a full repeal—Paulsen’s preference—or a delay of the tax, which Republican leadership pursued in the final stages of the shutdown fight.

Though that effort failed, repeal supporters say congressional support is growing. Paulsen’s bill has 266 co-sponsors—more than half the House—and Democratic Senator Amy Klobuchar, who is helping guide the bill through the Senate and at one point pitched it as a shutdown solution, said she’s persuaded a handful of Senate Democrats to sign on to the effort. More than 30 Democrats—all of them Obamacare supporters—voted for a non-binding repeal bill in March.

Paulsen, Klobuchar and repeal supporter Senator Al Franken all said the proposal could move forward either in budget negotiations over the winter or in a broader tax reform effort next year, assuming lawmakers can agree to both one of those larger packages and a way to offset the revenue lost by ending the tax (which is certainly not guaranteed).

“We’ve gained so much momentum to either have it now or have it in the larger budget discussions, which we want to have at the end of the year or in January,” Klobuchar said last week. “I think there is a lot of positive development on that front, no matter what bill it’s on.”

'Plain vanilla constituent service'

Shaye Mandle, the CEO of Minnesota-based tech group LifeScience Alley, said there is a two-fold lobbying effort underway to get the tax off the books: National groups lobby leadership and connected lawmakers in D.C. while groups based in states with a heavy tech presense—Minnesota, Massachusetts, etc.—focus on their delegations. Their efforts have won support from interesting sources: a handful of liberals like Massachusetts Senator Elizabeth Warren have supported repealing the tax, as does the entire Minnesota House delegation, Twin Cities Democrats and all.

Considering the size of the device industry in many of these Democrats’ states, it’s not that surprising they’re backing repeal, University of Minnesota political science professor Larry Jacobs said. He called it “plain vanilla constituent service” for a lawmaker to back an industry’s priorities when that industry is so influential in their state.

“For Klobuchar or Franken, you’d be surprised if they weren’t fighting to protect one of the major industries in Minnesota,” he said. “In a sense, that’s their job.”

Medical device industry contributions 2012

Top 20 members of the House

Rank      Candidate Amount
1 Paulsen, Erik (R-MN) $113,350
2 Camp, Dave (R-MI) $77,400
3 Boehner, John (R-OH) $74,750
4 Upton, Fred (R-MI) $63,000
5 Matheson, Jim (D-UT) $61,246
6 Donnelly, Joe (D-IN) $50,421
7 Bilbray, Brian P (R-CA) $45,500
8 Dold, Robert (R-IL) $44,250
9 Boustany, Charles W Jr (R-LA) $42,055
10 Pitts, Joe (R-PA) $40,750
11 Kind, Ron (D-WI) $39,649
12 Burgess, Michael (R-TX) $37,500
13 McCarthy, Kevin (R-CA) $34,900
14 Neal, Richard E (D-MA) $34,073
15 Buchanan, Vernon (R-FL) $31,900
16 Thompson, Mike (D-CA) $31,050
16 Shimkus, John M (R-IL) $31,050
18 Murphy, Christopher S (D-CT) $30,227
19 Gingrey, Phil (R-GA) $29,500
20 Becerra, Xavier (D-CA) $28,898
Source: Open Secrets

The industry spreads its cash around as well, and Minnesotans benefit: Paulsen received the most House contributions from the medical supplies industry last cycle, $113,000. Klobuchar ($90,000) was third among senators last cycle and Franken ($12,950) is the industry’s second-favorite senator so far this year.

Paulsen dismissed the donations in a Politico article last week, saying, “This is about saving lives; it’s about helping patients.” Jacobs said the industry’s tactics have been about par for the course.

“I think it’s the usual bag of tricks: it’s campaign contributions, it’s lobbying, the med tech industry spends a lot of time with Minnesota’s senators,” he said. “Just substitute whatever the favored state industry is and you’d see the same dynamic playing out in every state.”

Idea behind the tax

The basic idea behind the device tax—as well as those on pharmaceutical companies, hospitals and insurance companies as a whole—is that the Affordable Care Act would grow the pool of potential device users so much to warrant a new tax to help fund the law.

Top 20 members of the Senate

Rank       Candidate Amount
1 Brown, Scott (R-MA) $165,850
2 Hatch, Orrin G (R-UT) $140,249
3 Klobuchar, Amy (D-MN) $90,025
4 Casey, Bob (D-PA) $57,450
5 Menendez, Robert (D-NJ) $49,138
6 Stabenow, Debbie (D-MI) $41,150
7 Baucus, Max (D-MT) $41,068
8 McConnell, Mitch (R-KY) $39,000
9 Barrasso, John A (R-WY) $38,750
10 Hagan, Kay R (D-NC) $35,150
11 Franken, Al (D-MN) $32,349
12 McCaskill, Claire (D-MO) $31,200
13 Corker, Bob (R-TN) $30,577
14 Feinstein, Dianne (D-CA) $29,500
15 Lugar, Richard G (R-IN) $28,250
16 Brown, Sherrod (D-OH) $27,500
17 Nelson, Bill (D-FL) $25,750
18 Cornyn, John (R-TX) $23,500
19 Gillibrand, Kirsten (D-NY) $23,150
20 Snowe, Olympia (R-ME) $22,400
Source: Open Secrets

Companies and lobbying groups say they haven’t seen that higher demand yet, though they’ve had to pay the tax for more than 10 months. They argue the ACA is unlikely to grow a new base of device users at all—many who need the products are older and already covered by some type of health insurance.

But tax supporters say business should pick up once the bulk of the law, including the individual insurance-coverage mandate, kicks in down the road. They point to a much-cited Wall Street report that predicts the device industry will eventually recoup all of the tax’s expenses through increased demand for its products.

“You should start to see it this year once coverage gains steam,” Spiro said. “Enrollment this year isn’t going to be full projected enrollment under the law. Device manufacturers can expect revenue to slowly increase.”

Industry lobbying groups say there’s already a pressing need to repeal the tax, warning it’s hurt venture capital investment in medical technology and led to stagnant company growth and, in some cases, layoffs—Paulsen said there have been as many as 10,000 so far.

Mandle said big companies are shedding their research and development budgets and cutting positions while small companies have been unable to grow their businesses.

Minnesota impact

In Minnesota, med tech giants say they’ve already factored the tax into their business expenses. Medtronic told the Star Tribune it will pay up to $120 million because of the tax next fiscal year, on sales of $16.6 billion. St. Jude, which saw $5.6 billion in revenue last fiscal year, will pay up to $60 million.

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A handful of smaller Minnesota companies say the tax is mostly delaying hiring. That’s the case for Clarus Medical, whose CFO, Randy Gatzke, said the tax is essentially a worthless expense for his company—he compared it to an employee who shows up and punches his time card, but who just sits around and refuses to work all day. The company tried to pass on the cost as a new line-item charge to its customers, but “the longer the year went on the less tolerant they became of it,” he said. “We’ve been eating that for a number of months here.”

Jennifer Ness said her company, Medsource, a 20-person outfit in Mound, is looking to expand its product development department, but it, too, has had to cover the cost since its customers won’t pay.

She also questioned whether Medsource would see any of the new device business promised by the law.

“Most of our products are for emergency medical services,” she said. “Emergencies aren’t going to increase just because everyone has health insurance.”

Joseph Schultz, the vice president of Nascent Surgical, said his company has struggled to attract new investors and said the tax may be pushing technology businesses out of the country (tax supporters say this fear is overblown, since the tax applies to the sale of all devices in the United States, foreign-made or otherwise). When foreign business groups have tried convincing Schultz and others to move off-shore, “it’s been pretty convincing,” he said. “I think if I were to start this thing again, I don’t think it would be in Minnesota.”