Sound bites erupted with such force after the Supreme Court’s decision on the national health-care reform law that it might have been easy to overlook a new challenge for a local industry. The law includes a 2.3 percent tax on the sale price of medical devices as part of its funding stream. Economic developers have […]
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Sound bites erupted with such force after the Supreme Court’s decision on the national health-care reform law that it might have been easy to overlook a new challenge for a local industry.
The law includes a 2.3 percent tax on the sale price of medical devices as part of its funding stream. Economic developers have pointed to medical technology as a current strength in upstate New York and talked of its potential for future growth for years.
“It’s substantial,” Welch Allyn President and CEO Steve Meyer says of the tax’s effect. “It has many companies, including us, really struggling through how to manage this.”
Welch Allyn, headquartered in Skaneateles Falls, manufacturers a range of medical devices from blood-pressure cuffs to ear scopes. The firm employs more than 2,700 people worldwide and 1,300 in Central New York.
The tax, which takes effect in January, is likely to affect all areas of Welch Allyn’s business. Nothing is off the table — including layoffs and other cost-cutting moves — when it comes to managing its effects, Meyer says.
Nationwide, the medical-device tax could result in more than 43,000 lost jobs, including more than 2,100 in New York, according to a study from AdvaMed, a national trade association for the medical-device industry.
Items bought by the public for individual use, such as eyeglasses, contact lenses, and hearing aids, are exempt from the tax. Also exempt are devices produced for export, according to the IRS.
One of the tax’s greatest dangers is its potential to hurt future investment, Meyer says.
“This is one of America’s prime industries,” he says. “This is a shining star on the hill in a lot of ways. And yet here we go again with another set of aggressive taxes which are going to impede our ability to effectively invest and effectively compete.”
U.S. medical-device companies are facing increasing competition from overseas firms, he adds. The new tax only adds another challenge.
Passing the cost of the tax to customers would be difficult in the current economic climate, Meyer says. In addition, much of Welch Allyn’s business is governed by contracts that range in length from three to five years.
Customers expect stable pricing, Meyer says.
The tax does have its supporters.
Health-care reform will increase the ranks of the insured in the country and could actually spark a bump in demand for medical devices, according to a report in support of the tax from the Center on Budget and Policy Priorities, a Washington, D.C. think tank. The new business could completely offset the effect of the tax.
In addition, the law’s focus on lowering health-care costs could spark more innovation in the industry, not less, as the nation is forced to develop new, more efficient ways to provide care, according to the report. The tax is also not likely to shift employment offshore as it applies equally to devices made domestically or overseas.
Most of the burden of the tax will be carried by the very largest medical devices companies, the report added.
ConMed Corp. (NASDAQ: CNMD) of Utica is fortunate that half its sales come from outside the U.S., CFO Robert Shallish says. None of those sales will be subject to the new tax, he notes.
ConMed products include a number of devices used in surgical settings. The firm employs 3,400 people and generated sales of more than $725 million in 2011.
The company is not likely to change any of its research and development activities as a result of the tax, Shallish says. He declined to comment on any specific steps the firm might take to cut costs.
Medical-device companies are still waiting for guidelines on the tax from the IRS, says Heather Erickson, former president of Syracuse–based MedTech, a regional trade association for the device industry. Erickson left MedTech on Aug. 1 to become president and CEO of the Life Sciences Foundation in San Francisco.
For smaller, younger companies, the tax could delay profitability, Erickson says. It also adds another hurdle when those firms are out searching for capital.
Bigger companies face significant additional reporting costs because of the tax, Erickson adds.
Final rules concerning the tax will likely emerge sometime in the fall, she says.
“That’s sort of where we are,” she says. “We’re waiting to hear from the IRS on how they’re going to implement this.”
Contact Tampone at ktampone@cnybj.com