Photo: Cook Medical
A provision in the federal health care law that the U.S. Supreme Court upheld last month requires companies that produce medical devices, such as hip replacements and catheters, to pay an additional tax on the products they sell in the United States.
Indiana’s many biotech companies say the tax will be devastating to their profit margins, but supporters of the tax say the companies stand to benefit from the health care law.
Finding Funds To Pay The Tax
Steve Ferguson is the chairman of Cook Group, a Bloomington-based company that produces more than 16,000 different medical products sold in 135 countries. He says since the law was upheld, the company has already put some of its expansion plans on hold.
People are going to look carefully at places like Canada with a 15 percent corporate rate.
- Steve Ferguson, Cook Group Chairman
“Knowing that the tax is there, you’ve had to think about our long-range plans because you don’t just make decisions 30 days out,” he says.
And if Cook does expand, Ferguson says, officials may look to do so at one of the firm’s existing facilities overseas because, he says, the device tax, along with high federal corporate taxes are becoming overwhelming.
“Your federal and state and now this excise tax bring you up to above 50 percent of revenue,” Ferguson says. “I think people are going to look carefully at places like Canada with a 15 percent corporate rate or Ireland at a 12 and a half percent.”
But Paul Van de Water, a senior fellow with the Center on Budget Policy Priorities, says companies wouldn’t benefit from moving overseas.
“The tax is constructed in such a way that it creates no incentive whatever for companies to that and the reason is two-fold,” he says. “First of all, the tax applies to goods that are sold in the U.S. but imported from abroad.”
Secondly, he says, exported goods are exempt from the tax, so foreign companies won’t have an advantage there.
The Cost Of A Good Reputation
How much of the taxes get passed on to consumers is hard to predict. Dr. David Fisher from Ortho Indy says he expects to pay at least a little more for the hip replacements and other devices he uses. He says he could buy more generic products if costs went up, but they haven’t been tested as much as the name brands.
“When I put a device in a patient, I’m hoping it will serve that patient for 30 years or more and there are issues that I worry about such as the quality control of the device, if it will last or if it will break,” he says.
And that reputation comes with a price. It costs money, labor and time to go through all the research and apply for FDA approval.
Ferguson says Cook typically reinvests 10 percent of its profits. As it turns out, that’s the same percentage loss Indiana University business professor George Telthorst estimates the tax will amount to for medical device producers.
“They are going to be taxed 2.3 percent of their total revenues as opposed to an income tax, so the effect of this is that when it ripples through their P&L, they’re really going to end up paying about another 10 percent income tax,” he says.
A difference of up to 2.3 percent in the price of that product isn’t going to be a major deciding factor on whether to go ahead with that research effort.
- Paul Van de Water, Center on Budget Policy Priorities
Here’s how that works. Say Cook sells a medical device for $100. It will be taxed 2.3 percent or $2.30. And if the company is making $20 profit on that product, 10 percent of its profits are now going to taxes.
So Telthorst says companies are going to have to cut somewhere and research seems like one of their only options.
“The rate of innovation in terms of next generation products, new products, improvements in products and therapies is going to be slower than it was,” he says. “We’re not at a bad place now but we will not be in as good as of a place in 10 years if this law is not changed.”
But Van de Water says if companies are really trying to stay competitive, they will absorb the cost.
“A difference of up to 2.3 percent in the price of that product isn’t going to be a major deciding factor on whether to go ahead with that research effort,” he says.
Van de Water does admit the tax will affect Indiana more than other states because of its focus on biological sciences. But, he argues, the state also stands to benefit most because of new patients who will be entering the market when all Americans are required to have health care.
Just weeks before the U.S. Supreme Court declared the health care law constitutional, the House of Representatives passed a repeal of the tax, but it faces likely stoppage in the Democratic controlled Senate.