Excise tax puzzles medical device makers

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Stephen Bollinger, president and CEO of Rinovum Women's Health on the South Side, is planning a market launch next quarter for the company's medical device that he says will help infertile couples conceive in the privacy of their home at a much lower cost than in vitro fertilization.

The company is small, with only 10 employees, but with an estimated 1 in 6 couples having difficulty getting pregnant, he's confident there's a market.

While Mr. Bollinger's staff works to solve some of life's mysteries, though, he remains puzzled about why he and other medical device makers now face a 2.3 percent excise tax on their total revenue beginning Jan. 1, part of the national health care overhaul law known as Obamacare.

"We don't quite understand why this tax is required," Mr. Bollinger said.

The tax will generate about $20 billion over 10 years to help pay the cost of expanding health care coverage to more than 30 million uninsured Americans. The increased number of insured will mean greater demand and sales for medical devices, so the argument goes, helping to offset the cost of the tax.

Mr. Bollinger is unconvinced: "You don't make that up by volume."

When Mr. Bollinger and others in his field look at this tax, they see another impediment to small companies working on innovative approaches to pressing health issues -- an impediment that may make investors more cautious about funding their work and make the companies slow to hire additional staff.

James F. Jordan is chief investment officer for the Pittsburgh Life Sciences Greenhouse, which has provided capital support for local life science startups such as Rinovum -- as well as ALung Technologies, which provides respiratory support for patients; Cohera Medical, makers of a surgical adhesive; and ClearCount Medical Solutions, which has developed technology to count and locate surgical sponges so they are not inadvertently left in a patient at the end of the operation.

Mr. Jordan, too, said he finds the excise tax "sort of confusing" because it targets a product category that he believes may be in the best position to fulfill the mission of health care reform -- improving medical care, at lower cost, to greater numbers of people.

He said a 2.3 percent tax on total revenue may translate to a 15 percent tax on a company's gross profit, which leaves a manufacturer with few choices: It could move jobs overseas or lay off staff to reduce labor costs or simply pass the added cost on to customers. "What strikes me is that only one product category out of many has been targeted," Mr. Jordan said.

Those sentiments are echoed by the Washington, D.C.-based Medical Device Manufacturers Association (http://www.medicaldevices.org/issues/Health-Care-Reform,-Device-Tax) which has said the tax "will stifle innovation, harm patient care and weaken the position of the United States as the global leader in medical device innovation."

The tax is not without its supporters. The liberal research group Center on Budget and Policy Priorities, also based in Washington, D.C., has disputed claims that the tax singles out the medical device industry, or that it will result in companies shifting production overseas, or even that it will have much effect on future innovation. It also concluded that consumers will feel little effect.

"Spending on taxable medical devices represents less than 1 percent of total personal health expenditures, so a small increase in their price would have an almost imperceptible effect on health insurance premiums," the center wrote in an analysis released in May that can be found at http://www.cbpp.org/cms/?fa=view&id=3684.

Costly or not, Mr. Bollinger said dealing with the tax has unquestionably complicated his business plan.

"We only make a certain amount of revenue at the end of the day, and now you're taking another part of that revenue," he said. "You can only take so much profit out of a company before it becomes unprofitable."

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963.


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