WASHINGTON — Medical device manufacturers, including those in the home medical equipment sector, are mustering forces to combat a proposed excise tax on their products, saying it could impede research and development, cost jobs and increase the cost of health care.
The Senate Finance Committee is proposing the tax as a "pay for" in its $856 billion health reform package. The committee's bill calls for device makers to pay $40 billion in fees over 10 years, with payments varying based on each company's market share.
Why $40 billion?
"Basically, there is a $4 billion-per-year hole that the medical device manufacturers would be responsible for filling," explained Cara Bachenheimer, senior vice president, government relations, for Invacare Corp. The Elyria, Ohio-based company is the largest home medical equipment manufacturer in the nation.
But siphoning the fees out of a home care sector already being sucked dry through competitive bidding, a 36-month oxygen rental cap, elimination of the first-month power wheelchair purchase option (also included in the Senate proposal) and a 9.5 percent DME cut that took effect Jan. 1 would be disastrous, stakeholders said.
"This is a triple hit with the first-month purchase option elimination, competitive bidding and now this," said Seth Johnson, vice president, government affairs, for Pride Mobility Products in Exeter, Pa. "You add an additional cost to the health care system and it is going to increase costs [to consumers]."
Walt Gorski, vice president of the American Association for Homecare, agreed. "Not only is it a tax on manufacturers, but the only realistic way for manufacturers to react is to … pass the cost of the tax to providers," he said. "So providers are, quite frankly, being squeezed from the reimbursement side and the cost side. We think that is an untenable situation."
AAHomecare joined 42 other organizations representing hundreds of medical device and diagnostics manufacturers across the nation last week in sending a letter decrying the proposal to Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and Sen. Charles Grassley, R-Iowa, ranking member.
The proposed tax would "ultimately have a negative effect on patients, health care providers, and consumers, as it increases the cost of health care," the letter read. "We ask you to eliminate this proposal from consideration."
Squeeze Play
The proposed tax caught HME stakeholders by surprise when it surfaced, first in the Senate Finance Committee's framework for health reform, and then in more definitive language in the "chairman's mark." Baucus released the latter, a version of the committee's proposed health reform legislation, on Wednesday in advance of the full committee markup of the draft legislation. The markup could begin as early as Tuesday.
As proposed, the tax would be levied on anyone who manufactures or imports medical devices offered for sale in the United States. A medical device would include Class 2 and Class 3 products as defined by the FDA, which would encompass all power wheelchairs and oxygen, as well as other HME. It would not include Class 1 items, such as canes, crutches and walkers.
Each entity's portion of the tax would be based on its relative market share of covered domestic sales for the prior year. Firms with sales up to $5 million would be exempt from the tax. For those companies with sales of $5 million to $25 million, the tax would be levied on 50 percent of sales; for those with sales of $25 million or more, it would be assessed on 100 percent of sales.
Bachenheimer said Invacare began studying the proposal when it first arose in the framework released earlier this month and quickly became concerned about its potential impact. The company sent a letter to Ohio's senators, Republican George Voinovich and Democrat Sherrod Brown, expressing its opposition and detailing the potential consequences of the tax.
"Hundreds of Ohio jobs will be lost as Invacare would be forced to restructure," wrote Invacare Chairman and CEO Mal Mixon. In addition, he said, profits and R&D would be eliminated.
"If this tax goes into effect, it will penalize manufacturers who are at the forefront of research and development," Mixon wrote. "Invacare's research and development is 1.5 percent of sales. In the first six months of 2009, Invacare's net earnings margin on a GAAP [generally accepted accounting principle] basis was 1.2 percent of sales. This new tax of over three percent will severely damage our ability to bring new products to market that enhance people's quality of life. In other words, this 3.1 percent tax from sales becomes a 100 percent tax on Invacare's earnings and R&D investment."
Mixon also noted that the tax would raise health care costs, since much of the cost of the tax would be passed on to patients.
"It does not make sense to finance health reform by taxing countless products that patients require," he wrote. "Bearing the burden of an acute illness or chronic condition is costly enough; the additional financial penalty on these same patients seems unjustified."
And there are additional questions about the tax, Bachenheimer said.
"We have some questions that haven't been answered," she said. "If you are a foreign-based company and you sell medical devices in the U.S., I am not sure the IRS has the authority to tax you. That's one of the big questions we have. We are not confident that the authority exists or the ability exists to reach those people."
Another question has to do with verification of actual sales of private companies and importers. Public companies such as Invacare must report their sales, Bachenheimer noted, but "there are scads and scads of importers and other manufacturers that are not public companies." Those companies would be required to report their sales to a public agency and their tax liability would be figured on that report, but there is no provision — in the mark, anyway — as to how those figures would be verified.
All of this could change as the markup proceeds, Bachenheimer said.
"We expect Sen. Baucus to start the markup on Tuesday, and that means we would have draft language. I am sure there will be changes, more details, surprises," Bachenheimer said.
That also means there is an opportunity to get the tax eliminated from the final proposed bill, she said, and "there are very large companies working on this in Washington, like Johnson & Johnson and Hill-Rom. It's not just our industry," Bachenheimer said.
"That's why the advocacy efforts on these issues must continue," added Johnson. "It's even more important now that Congress is fully engaged in getting health care reform through. We need to make sure we are fully engaging clinicians and all stakeholders in carrying the message to Capitol Hill."
Gorski said AAHomecare is working with its manufacturer members to seek alternatives to the excise tax, but the aid of all stakeholders is vital.
"We consider the Senate Finance package, including the excise tax, a danger to the entire HME community," he said. "The Senate proposal should be a very clear warning and should be a unifying event … The HME community has shown its ability to rally and muster its forces to address its concerns on Capitol Hill. We need to do so again."