Firms Budget For Device Tax In 2011, But Push For Further Delay

Full article reprinted from "The Gray Sheet" - January 18, 2010

Device makers are beginning to budget for a 2011 start date for a new tax on medical device sales, but that does not mean they have given up hope for a further delay of the tax. Read more...

Firms Budget For Device Tax In 2011, But Push For Further Delay

Full article reprinted from "The Gray Sheet" - January 18, 2010

Device makers are beginning to budget for a 2011 start date for a new tax on medical device sales, but that does not mean they have given up hope for a further delay of the tax. Both Medtronic and St. Jude Medical signaled to investors last week to expect the tax, included in pending health care reform legislation, to begin in 2011, as included in the approved Senate bill, rather than 2013, as included in the approved House bill. "We expect it to begin to impact our earnings in 2011. [That would] be our guess," St. Jude CEO Dan Starks said Jan. 11 at the J.P. Morgan Healthcare Conference in San Francisco. "Although we have to wait to see details of the legislation to know for sure." Meanwhile, in a Jan. 11 research note from the meeting, J.P. Morgan analysts said that Medtronic executives had indicated in private discussions that the 2011 start date "looks like all but a done deal." But in response to an inquiry, a Medtronic spokesman disputed that interpretation of the company's view. "For our budgeting purposes we have to plan as if it will be 2011, but there's better than a 50-50 chance that the start date will be 2013, and that remains one of our highest priorities," Chuck Grothaus, the spokesman, said. Both the Senate and House bills aim to collect about $20 billion from industry by 2019. Press reports last week suggested that lawmakers were considering upping the total to $30 billion to pay for revenue lost in a recent compromise with unions on taxing high-end insurance plans. But Capitol Hill and industry sources tell "The Gray Sheet" that while increasing the device tax was briefly raised as part of negotiations, it is now off the table. Medtronic Favors House Tax Structure Another matter that needs to be addressed in the final reform package is how the device tax funds will be collected (The Gray Sheet' Jan. 4, 2010). The Senate would collect an annual fee calculated for each company based on its prior-year market share, while the House would implement a 2.5% point-of-sale excise tax for all qualifying products. Medtronic, for one, prefers the House approach, which "as a conventional excise tax and with a more rational retail exclusion, is better tax policy," Grothaus explained. The House bill would exclude all devices sold to consumers at retail, while the Senate excludes all FDA Class I devices and Class II products sold at retail for $100 or less. If the House language prevailed, Medtronic and others are pushing for a lower tax rate than 2.5%. Companies claim that the models used by the House to arrive at a 2.5% excise tax might underestimate 10-year industry growth rates. If so, the tax could collect well more than the advertised $20 billion. "We continue to be sensitive to the economic assumptions that led to the 2.5% rate, but we are working with [the Joint Committee on Taxation] and [congressional] leadership to address it," Grothaus said. Medtronic's position in favor of the House structure is not universally shared. Venture-capital-funded firms and other smaller players want lawmakers to add more generous exceptions from the tax for lower-revenue companies, which would be logistically easier to accomplish with the Senate's annual fee approach. Further, hospitals and group purchasing organizations are pushing for the Senate version. "We are concerned that the structure of the House bill would make it easier for manufacturers to pass the cost on to hospitals," writes Blair Childs, senior VP-Public Affairs for GPO Premier, in a Jan. 12 letter to House and Senate leaders. The American Hospital Association has expressed similar sentiments. Childs says that Premier, though, supports a start date of 2013 rather than 2011 to give all parties more time to prepare for the implications of the tax. - David Filmore

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