Return of Medical Devices Tax Could Hit Massachusetts Businesses

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By Matt Murphy
State House News Service

BOSTON — The failure of Republicans in Congress this year to repeal the Affordable Care Act means that a controversial tax on medical device sales will return in 2018 unless legislators intervene in the next couple weeks, putting a major Bay State industry on edge.

The tax, which was included in the 2010 health care reform law as a way to help pay for an expansion of Medicaid, puts a levy of 2.3 percent on devices like X-ray and MRI machines, surgical instruments, and pacemakers. After a brief suspension, the tax is set to be reinstated in January.

Many members of the Massachusetts delegation have been vocal in their opposition to the medical device tax since its inception, but on this past week Republican Beth Lindstrom sought to make it an issue in her U.S. Senate campaign by calling out U.S. Sen. Elizabeth Warren for not pushing repeal during the Senate tax reform debate.

“The medical device industry produces a constant stream of life-saving innovations. As Senator, one of the first things I’ll do will be to file a repeal bill and work with colleagues on both sides of the political aisle to pass it,” Lindstrom said in a statement.

The medical device industry in Massachusetts, according to the Massachusetts Medical Device Industry Council, accounts for about 480 firms and 21,000 jobs. Seventy percent of those companies, MassMEDIC President Tom Sommer said, have fewer than 10 employees and could struggle to comply with and absorb the tax.

“The next 24 to 72 hours are going to be critical to efforts to repeal or suspend this tax further,” said Sommers, who took part in a conference call Wednesday on the issue with the national Advanced Medical Technology Association.

With House and Senate leaders in Washington arriving at a compromise Wednesday on tax reform, Sommers said the hope is that Congress will turn its attention in the final weeks of the year to other issues that must be dealt with, including a reauthorization of the Children’s Health Insurance Program.

Lindstrom wrote a letter to Warren and U.S. Sen. Edward Markey in October during the tax reform debate on Capitol Hill urging them to use that as an opportunity to eliminate the tax for good, but repeal did not make it into either the House or Senate tax bills.

She blamed Warren for being “too busy grandstanding her opposition to lower taxes.”

A spokesman for Warren said the senior Democratic senator opposed the Republican tax bill, as did all other Democrats in the Senate, making it an inappropriate vehicle to push for other reforms.

Warren has long supported repeal of the medical device tax, though she has favored, like many other Democrats, ensuring that the lost revenue would be replaced.

“When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential. It also pushes companies of all sizes to cut back on research and development for life-saving products. With an appropriate offset, we can repeal the medical device tax without cutting health care coverage for millions of people or forcing Americans to fight the whole health care battle all over again,” Warren wrote in a 2012 op-ed during her first campaign for Senate.

The Congressional Budget Office estimates that elimination of the medical device tax would cost the Treasury $24.4 billion over a decade.

After the tax was collected in 2013, 2014, and 2015, it was delayed by Congress and is set to resume on January 1.

House Ways and Means Chairman Kevin Brady announced a package of bills introduced this past week to provide relief from Obamacare taxes, including the “Cadillac tax” on high-cost insurance plans. One bill sponsored by U.S. Representative Erik Paulsen of Minnesota would suspend the medical device tax for another five years.

It’s possible that one or more of those proposals could be attached to an end-of-year spending bill or Children’s Health Insurance Program reauthorization, industry insiders believe.

“We’d like the permanent repeal, but suspending the tax for another five years would be an important first step to dealing with the uncertainty in the industry right now,” Sommers said.

Because of the way the device tax is structured, Sommers said that without a repeal or suspension of the tax, medical device firms would have to make a first payment the second week of January based on estimated sales going forward. This requirement, he said, particularly hurts small device manufacturers and start-ups that don’t have a lot of capital.

“We’ll see what we saw during the years the tax was in place. Companies will be looking very carefully at their expenditures in research and development and investments in innovation. They’ll be looking at head count and other ways to slim down to account for the 2.3 percent that’s taken off the revenue line,” Sommers said.

Lindstrom’s campaign said that from 2005 to 2010 prior to passage of Obamacare, employment at Massachusetts medical device companies grew by 15 percent, and held steady during the recession. However, employment fell by 9 percent from 2011 through 2016.

Sommers said MassMEDIC doesn’t have precise numbers on the numbers of jobs lost following passage of the Affordable Care Act, but said he knows anecdotally that layoffs attributed to the tax did occur.

U.S. Representatives Seth Moulton of Salem, Steve Lynch of Boston, and William Keating of Bourne have been active in pushing for repeal of the device tax, according to MassMEDIC, while others in the delegation have also been supportive.

Warren voted for a repeal amendment in 2013, and she also backed legislation filed by Moulton in 2015 to eliminate the tax, according to an aide.

“We’re hopeful that the next week will bring some positive news from Washington,” Sommers said.