CLSA in the San Diego Business Journal: Industry Welcomes Suspension of Device Tax

HEALTH CARE: Tax Said to Hurt Staffing, R&D Efforts at Cos.

By Jared Whitlock | Read at the San Diego Business Journal
Monday, February 5, 2018

San Diego — While San Diego’s medtech hub is cheering the recent suspension of a 2.3 percent excise tax on medical device makers, a full repeal remains the industry’s ultimate goal.

A deal that Congress struck Jan. 22 to reopen the federal government included a two-year moratorium on the tax, retroactive to Jan. 1. This marks the second delay in the tax, imposed in 2013 on heart stents, artificial joints and other devices to help fund the Affordable Care Act.

It was put on hold in 2016 and 2017, but went back into effect at the beginning of this year, alarming companies who faced not only higher taxes but costly accounting and reporting upgrades to make monthly payments.

Tax Is on Sales

Smaller but fast-growing companies like Carlsbad’s Ra Medical Systems stood to be hit the hardest. That’s because it’s a tax on sales, not income, while these businesses rely on sales revenue to build out operations.

Ra Medical Systems CEO Dean Irwin said in early January the tax could amount to millions off its top line, and thus a reduction or a delay in planned hires. But in a recent interview he said the suspension provides “breathing room.”

“We’re going to use those dollars to expand,” Irwin said.

The suspension comes at a critical time for Ra Medical. It’s pumping up sales on its recently released Dabra system, a laser catheter to treat a disease known to lead to amputations. Last year Irwin forecast the laser would trigger a huge boost in annual revenue, from $10 million in 2016 to potentially $100 million.

Irwin said the suspension spares the company from significantly investing in new accounting infrastructure for device tax payments. Some systems were already in place for when the tax was in effect from 2013 to 2015, but new products have since come online.

“The tax wasn’t appropriate and really wasn’t in the interest of the American people as well as the medical device industry,” Irwin said. “I had high hopes Congress would come to their senses and either suspend or repeal, so I’m very pleased they did.”

$3.7B Loss in Tax Revenue

Proponents of the tax say it’s an important funding mechanism for the Affordable Care Act. The federal government estimates a $3.7 billion loss in revenue as a result of the two-year suspension.

Opponents argue it stifles lifesaving research and jobs. When the tax was in effect from 2013 to 2015, the medtech industry lost nearly 29,000 jobs, or 7.2 percent of its workforce, according to an analysis last year from the advocacy group Advanced Medical Technology Association, or AdvaMed.

San Diego, home to medtech giants like NuVasive and ResMed, has 9,400 device jobs, according to a 2018 California Life Sciences Association report.

“It really is such a strong part of the ecosystem for San Diego and Southern California overall, and so we can’t overstate the importance of this specific issue to our device membership,” said association President and CEO Sara Radcliffe.

She said although the group is grateful for a suspension, a full repeal would bring tax certainty given that the industry plans years in advance.

Case for Repeal

“Even though the tax is suspended, it still has an impact on the way they think about investing in research and development and hiring new personnel,” Radcliffe said.

Last year efforts to eliminate the tax were tied to failed legislation to repeal and replace the Affordable Care Act, also known as Obamacare. Radcliffe said a specific vehicle for repeal hasn’t been identified, but cited bipartisan support.

But complicating the picture: Some pro-repeal Democrats say the loss of tax revenue from a repeal should be replaced elsewhere to fund the Affordable Care Act. In mid-January, Massachusetts Sens. Elizabeth Warren and Ed Markey reintroduced a bill that would offset the revenue by ending a projected $29 billion in tax breaks over the next decade for oil companies.

Read at the San Diego Business Journal (Sbcr may be required).