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Medical device makers: New tax will cost jobs

By Steve LeBlanc
Associated Press Writer / June 7, 2010

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BOSTON—Medical device manufacturers are bristling over a key provision in the nation's new health care law which they say forces them to shoulder an unfair cost of expanded insurance coverage.

A 2.3 percent excise tax on companies that supply medical devices like heart defibrillators and surgical tools to hospitals, health centers and ambulance services will cost medical device manufacturers an estimated $20 billion in new taxes over the next decade. And they say that will force them to lay off workers and curb the research and development of new medical tools.

"Many small to midsize medical device companies will owe more to the federal government in taxes than they make in profits," said Mark Leahy of the Medical Device Manufacturers Association. "We're talking about a 2.3 percent tax on total sales irrespective of whether a company is making a profit."

It could have been worse: the initial proposed tax was $40 billion.

Brett Loper, a senior vice president for Advamed, the world's largest medical device trade group, said the organization was looking for ways to bring the levy down even more before it takes effect. He also dismissed arguments that the higher tax would be offset by increased demand as tens of millions of more Americans are insured as a result of the health care overhaul.

"It's hard to argue that there is going to be an enormous swell of those products," he said. "Is there going to be a huge new demand for those products? I'm not sure."

Sen. John Kerry, D-Mass., who helped arrange meetings between medical device companies and Democrats leaders in Congress to convince them to cut in half the original proposed tax hike, maintained there would be a benefit for the companies.

"We've just expanded their marketplace by 32 million people who will now buy products from them," he said. "This is going to work out just fine."

The tax, which doesn't kick in until 2013, has touched a nerve in Massachusetts, the state that provided the blueprint for the health care law. Massachusetts is also a hub for medical device companies, with more than 200 firms calling the state home. It has also pitted its senators against one another.

Kerry, a Democrat, said the 2.3 percent in no way strips the profits or the ability of any company to be able to do business.

"The medical device people were at the table. They agreed to this. They helped to write it and we need to just move forward," he said.

He pointed out the tax doesn't apply to eyeglasses, contact lenses, hearing aids, or other retail medical devices purchased by the public.

Republican Sen. Scott Brown, who won a special Senate election in part by vowing to block the national health care bill, made the medical device tax one of his first issues after taking office. Brown condemned the tax, calling it threat to a local industry.

"For a lot of them, that's their profit that's going to be eaten up by this tax," Brown said, faulting President Barack Obama for failing to acknowledge problems in the health care bill. "The problems are the medical device companies are going to be whacked."

Senate Majority Leader Harry Reid, D-Nev., agreed to slash the tax from $40 billion to $20 billion in part to win backing for the health care bill from Democratic Sen. Evan Bayh of Indiana, a state with a significant medical device industry.

California has the highest number of medical device workers with more than 72,400 followed by Massachusetts with nearly 22,000, Florida with nearly 20,000 and Minnesota with more than 18,000, according to industry estimates. Other states with significant medical device hubs include: New Jersey, Pennsylvania, New York, Texas and Ohio.

Richard Packer, CEO of Chelmsford, Mass.-based Zoll Medical Corp., which employs 650 workers in Massachusetts, said the tax will put his company, which produces defibrillators, "at a break-even position" and dismissed the idea that companies should be grateful the tax wasn't higher.

"When the negotiations started it was going to be $40 billion and our industry negotiated it down to $20 billion," he said. "We would be losing money instead of just breaking even, that's not my definition of a fair negotiation."