Local CEO: Excise tax hampers innovation

Most of the focus of the Affordable Care and Patient Protection Act has focused solely on the insurance provisions in the law — whether it’s legal to require people to have health insurance. But another regulation, found deep in the bill, is causing problems for a company in Colorado Springs.

“The medical device tax is on revenue, not profit,” said Scott Drake, CEO of Spectranetics, a publicly traded company that manufactures medical devices in Colorado Springs. “And it takes years to turn a profit in this industry. It’s stifling innovation; it’s stifling investment.”

Venture capitalists don’t want to see their money go to taxes instead of research ­— so they’re finding other places to invest.”

– Scott Drake,

Spectranetics CEO

Basically, the Affordable Care Act adds a 2.3 percent tax on revenue for medical device companies, hoping to raise $20 billion during the next decade to offset some of the cost of the law, which provides federal government subsidies for low-income people to purchase insurance. The tax started in 2013, and companies across the industry say it is changing their profit margin to negative.

Small companies hurt

It’s undermining a profitable industry, opponents claim. The medical device industry in the United States ships $136 billion in products, pays $25 billion in salaries and employs more than 400,000 people, says Policy and Medicine, a nonprofit industry group that points out that thanks to medical devices, the average person’s life expectancy has increased by more than three years and disabilities have dropped by 25 percent.

According to Policy and Medicine, the tax hits small companies the hardest: 80 percent of medical device companies have fewer than 50 employees and 98 percent have fewer than 500. In addition, each medical technology job has a multiplier of 1.5 jobs in the state.

The tax burden is something Drake knows all about. He employs about 375 people in the Springs at a research and manufacturing site just off Voyager Parkway. In the first six months of 2013, Spectranetics paid $1 million for the new tax, according to its SEC filings. It expects to pay another $1 million in the second half of the year. Last year, the company’s profits totaled $648,000.

“Many companies won’t have a profit,” Drake said. “Venture capitalists don’t want to see their money go to taxes instead of research — so they’re finding other places to invest. This is the most unpopular part of the law. There’s bipartisan support for changing it, but that can’t happen without opening the entire bill to be changed. That’s never going to happen.”

The Medical Device Manufacturers Association opposes the tax, claiming in a release that the “overwhelming majority of innovation from the medical device industry comes from smaller manufacturers who work closely with clinicians and engineers to develop the therapies and treatments of tomorrow.

“If it is not repealed, this tax will stifle innovation, harm patient care and weaken the position of the United States as the global leader in medical device innovation.”

Drake says the nation already has so many regulations in place that much of the innovation for medical devices is occurring outside the United States.

“We used to be the first in the world to benefit from the latest medical devices,” he said. “But now we’re 40th. It’s just easier and cheaper to get devices approved for use in Europe than it is here. It takes too long and it’s too expensive to conduct trials in the United States. This tax just adds to that.”

But not everyone agrees that the excise tax singles out medical device companies unfairly or that it will harm innovation. According to the Center on Budget and Policy Priorities, health care reform could spur innovation as medical device companies and the health care industry seek ways to become more efficient.

“The tax does not single out the medical device industry for unfair treatment,” said Paul N. Van der Water in a white paper on the center’s website. “The excise tax is one of several new levies on sectors that will gain business due to health reform. The tax will not cause manufacturers to shift production overseas. The tax applies equally to imported and domestically produced devices and devices produced in the United States for exports are tax-exempt.”

Unpleasant alternative

Repealing the tax would cost $29 billion during the next decade and would require Congress to offset the cost of the repeal by increasing taxes or targeting insurance coverage for more than 27 million Americans granted it under the ACA, Van der Water said.

“Also, repealing the tax would encourage efforts to repeal other revenue-raising provisions of the ACA, which in turn would either require still more painful offsets or increase the budget deficit (if Congress failed to offset the cost),” he said.

The biggest problem for the industry isn’t the excise tax, he says, but instead “anxious regulators” and device recalls.

But Drake says that the tax should have been on profits — not on revenue.

“The tax doesn’t come after the expenses are paid, after research and development,” he said.”It comes on revenue first. That’s the big problem. It takes years for companies to turn a profit because of the regulatory framework and needed trials. Now it’s going to take even longer.”