Medical device makers in Minnesota and across the nation this week started paying a 2.3 percent tax on products they sell.
The industry complains the tax, part of the federal health care overhaul, creates an unfair and unwise burden that will impede innovation and kill jobs. But supporters of the law contend the firms will benefit from an expansion of health care coverage — so they should share the cost.
About two dozen representatives of the state's medical device industry met earlier this week in Eden Prairie with U.S. Rep. Eric Paulsen. The 3rd District Republican assured them he remains committed to repealing the device tax. And he expects he'll have the Congressional delegations from Minnesota and other states with big med-tech industries backing him up.
"We need the members from Minnesota and these other states now to really step up and say this is important for jobs and health care," Paulsen said. "The effects of it are real. This is not the time to be reducing good, solid American manufacturing jobs. And that's going on right now."
Med-tech companies employ some 35,000 Minnesotans. And just this week, Boston Scientific, which has a major presence in Minnesota, announced as many as 1,000 more layoffs, and blamed the device tax in part. The device tax is expected to raise about $2 billion a year.
"It's really time to push the panic button," said Shaye Mandle, executive vice president for Minnesota's med-tech industry group LifeScience Alley.
The tax will eat into the profits of established companies, Mandle said. And he said that even unprofitable start-up companies developing new devices have to pay the tax.
"We've got tons of companies here in Minnesota that would love to get to a place where they can consider paying the tax," Mandle said. "They can't get investment. They've having trouble getting talent."
Signus Medical of Chanhassen, a maker of spine products, said the tax is already hurting its business. CEO Thomas Hoghaug said he had to cut jobs because of the tax.
"My first-quarter expansion plans are done," he said. "We laid off a couple of employees. We may lay off a couple more because this [the tax] is so regressive I can't pass it on to anyone."
Medtronic estimates the tax will cost it $125 million to $175 million a year. Boston Scientific forecasts a $60 million to $75 million hit from the tax. And St. Jude Medical has indicated it expects the tax will take $50 million to $60 million out of its pockets this year.
Last November, at a Piper Jaffray health care conference, St. Jude Executive Vice President John Heinmiller said the company had been cutting costs elsewhere to offset the impact of the tax.
"We look at the restructuring that we accomplished here in the second half of 2012 as delivering about $50 million to $60 million of cost improvement to our operating profit in 2013," he said, according to a conference transcript. "So, people have roughly equated that to what we would pay as a medical device tax. So I think if you think about those two things as offsetting one another, we wouldn't argue with that conclusion."
Morningstar med-tech analyst Debbie Wang said the tax might end up harming the development of startup companies. But she thinks big established companies are "probably screaming about it more about it than really is necessary."
She said the industry's power players will take less of a hit than she and other analysts initially expected.
"It's a modest effect on these companies," she said. "They knew this was coming. I will admit however that the tax a is very nice excuse to hide behind when you're trying to rationalize your workforce anyway."
The tax is an important financing component for the Affordable Care Act, the Obama administration's effort to expand health care coverage,
Jonathan Gruber, an MIT economist who is a key architect of the health care overhaul, charges the device industry wants to benefit from expanded access to health coverage without helping pay for it. "They get something," he said. "They get 32 million newly insured customers. They give up something. They have to pay a new tax to help pay the bill."
But device companies dispute that. They contend most newly insured people won't need pacemakers and other medical devices. The industry says these folks are too young and most people who need medical devices already have government or private insurance that pays for the equipment. But whether the industry is right or wrong about that, there seems to be little chance the tax will go away in the near term.
"To take away the device tax would mean a gap that would have to be made up somewhere else," said Norman Ornstein, a Congressional expert at the American Enterprise Institute. "The odds of overturning the tax are, to use one of George W. Bush's favorite slogans: 'Slim to none and Slim just left the building.' " In a few years, Ornstein said the industry might have a shot at doing away with the tax but only if it proves as devastating as the industry predicts.
Last June, Paulsen passed his bill to repeal the tax on medical devices through the U.S. House, winning the support of the entire Minnesota delegation. But the bill has not been able to get through the Senate, where Sens. Amy Klobuchar and Al Franken have argued for repeal of the tax.