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Winston-Salem Journal: Repeal of medical device tax gains bipartisan support

Jul 24, 2015
In The News

By FRAN DANIEL First Appeared May 8, 2015

Bipartisan support is building in Congress for elimination of the 2.3 percent medical device tax in the Affordable Care Act – a tax that affects Cook Group Inc., a device manufacturer with a plant in Winston-Salem.

U.S. Rep. Alma Adams, D-12th, introduced on March 23 the Medical Device Tax Elimination Act of 2015. This legislation would end the tax while maintaining healthcare subsidies under the act.

Rep. Elise Stefanik, R-N.Y., led a bipartisan group of freshmen lawmakers in sending a letter March 31 urging House Speaker John Boehner to bring a different bill repealing the tax to a vote. Rep. Erik Paulsen, R-Minn. introduced that bill, H.R. 160, in January.

Also in January, Sen. Orrin Hatch, R-Utah, introduced a bill to repeal the tax.

The tax took effect in January 2013.

A medical device is defined as devices “intended for humans.” Items such as eyeglasses, contact lenses and hearing aides are exempt from the tax, as well as other medical devices that are “generally purchased by the general public at retail for individual use,” as determined by the Secretary of Treasury. Medical devices made in this country and exported overseas are also exempt from the tax.

The medical device tax is projected to collect about $38 billion of excise-tax revenues over the next 10 years. Its aim is to help offset the cost of the Affordable Care Act, and finding a revenue replacement may be difficult, according to a January report on the tax by the nonpartisan Congressional Research Service for members and committees of Congress.

“There is also a concern among some that eliminating the medical device tax would lead to proposals to eliminate similar fees and taxes on other industries, the sum of which, including the device tax, totals $165 billion over 10 years,” stated The Medical Device Excise Tax: Economic Analysis. “The tax was justified partly because the medical device industry was among the commercial interests that stood to benefit from unanticipated profits as more individuals enroll in health care insurance, post-ACA.”

Jane G. Gravelle, a senior specialist in economic policy for the Congressional Research Service and co-author of the economic analysis, said that the medical device tax is a small tax compared with most excise taxes.

“We think that the tax will be passed on to consumers,” said Gravelle. “Then how consumers will react basically it depends on demand elasticities.”

The report suggests that the “effect on the price of health care, however, will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.”

The report also suggests a relatively small drop — probably no more than 0.2 percent — in U.S. output and jobs for medical device producers.

Executives at Cook are in favor of repealing the medical device tax.

Cook sells more than 14,000 different product variations. Its devices are used by physicians in more than 40 medical disciplines. They range from wire guides, needles and catheters, to grafts, drug-eluting stents and tissue engineering.

Without repeal, Cook will move important new, device-related product lines outside the U.S., said the company’s chairman, Stephen Ferguson.

Ferguson provided written testimony for the record before the Senate Finance Subcommittee on Health in April.

“The most significant barrier to our future U.S. job growth is the medical device excise tax,” Ferguson stated in his testimony.

“For a company like ours, which pays about 31 percent of our U.S. earnings in federal and state corporate income taxes, the excise tax will increase our effective rate on those U.S. earnings to 41 percent — a 32 percent increase," he added.

In an interview on Wednesday, Ferguson said that big expenses for companies tend to be wages and salaries, research and development and capital.

“We’ve never laid anybody off,” he said. “To cut back on employees and R&D doesn’t make any sense to us. So what we did was put our capital projects on hold.”

He said that 60 percent of the company’s sales are outside the United States, while 80 percent of its manufacturing is still in this country.

Besides North Carolina, Cook has manufacturing plants in Indiana, Pennsylvania, Illinois and California. The company also has manufacturing facilities in Ireland, Denmark and Australia.

Cooks plant in Winston-Salem employs 580 people.

Scott J. Sewell, vice president of technology acquisition and development in the endoscopy division for Cook, said that the Winston-Salem facility is out of space.

He said the company previously bought land where it can grow but Cook has a freeze on creating new infrastructure.

“That’s because our tax burden is $13 million a year,” Sewell said of the entire company. “That started in 2013.”

He said that the tax is making it hard for Cook to compete overseas, where a lot of its competitors operate typically in environments with lower tax rates.

Despite the debate, so far there have not been a lot of suggestions for an alternative way to help fund The Affordable Care Act.

Adams’ Medical Device Tax Elimination Act would cut tax subsidies from major oil and gas companies.

“Essentially, we want to continue to make health care affordable,” Adams said. “But at the same time, we want our small businesses to survive. This tax has created a tremendous burden for the businesses that provide the medical devices.”

Wake Forest Baptist Medical Center, which has a commercialization arm, declined to comment about the medical device tax issue, and the American Hospital Association gave a brief statement.

“We believe every part of the health care sector should contribute to increasing coverage,” said Marie Watteau, AHA’s vice president of media relations and digital media.