Medical device companies brace for return of Affordable Care Act tax

During the three years that the government collected a tax on sales of medical devices, Maple Grove's Inspire Medical Systems never turned a profit on its sleep apnea treatments.

CEO Tim Herbert says the company could have had 12 to 15 more employees if that tax money, which helped pay for the Affordable Care Act, had stayed in-house.

Herbert never understood why lawmakers thought it was productive to tax the revenue of Inspire and other device companies that had yet to operate in the black. Now that a two-year suspension of the tax is about to expire, he's more frustrated than ever.

Despite lawmakers' promises, the failure of Congress to kill the device tax has forced Herbert and leaders of hundreds of other Minnesota medical technology companies to adjust budgets and spend money to resurrect or create payment systems for a levy many thought would go away.

With the first installment of the reinstated 2.3 percent device excise tax due Jan. 29, Herbert says he "can't count on" Congress to act.

"We are already committing dollars to prepare to be compliant if [the tax] is reinstated," he said. "We will dedicate staff to [collecting and paying the tax]. And we will change our annual operating budget because we now have to account for those losses."

The same scenario is playing out across the state's massive device sector.

Cogentix is a urology device maker in Minnetonka that is projected to take in about $64 million in revenue in 2018.

"We held out hope that [the device tax] would be repealed," Chief Financial Officer Brett Reynolds said. "Going forward, it could cost us $600,000 or $800,000 [per year]. That's a meaningful number that we would otherwise invest in people, perhaps R&D, potential new business development. I'm sure the money is spent well within the government, but we'd rather put those dollars to work here."

The device tax helps fund the ACA, which provides income-based subsidies credited with helping to expand health care coverage to millions of people.

Several legislative vehicles exist to keep the device tax from coming back.

But only one, a Jan. 19 deadline for a budget resolution, has a set date. Others, such as a bipartisan extension of Medicare benefits or a separate tax extensions package, could come to a vote in January.

U.S. Rep. Erik Paulsen, R-Minn., a long-standing critic of the device tax, said he has the commitment of GOP House Speaker Paul Ryan "to address the issue."

But the promise did not come with a date, and Paulsen was unsuccessful in getting device tax repeal included in a tax reform bill passed in December or in attaching an extension of the current collection moratorium onto other end-of-year legislation. So Paulsen is pushing to have the device tax in the Jan. 19 budget deal.

"My viewpoint is that it is prudent to act sooner than later," said Paulsen, who serves a tech-rich district. "I am hearing from constituent companies that ... mothballed these tax collections for the last couple of years. Now they have to start them up again. It's a time commitment. It's a money commitment. There are companies that weren't even around two years ago that are experiencing this for the first time, and there is confusion."

For trade groups such as the Advanced Medical Technology Association, which includes dozens of Minnesota companies as members, there is a logistics issue: If device tax payments are made before Congress extends the moratorium or repeals the tax, retroactive refunds could be a time-consuming process.

"The Treasury Department is expected to issue guidance that there are no penalties that apply on collections," Paulsen said. "But they do not have the ability to waive the tax under the statute."

The device tax has survived multiple repeal efforts since it was included in the ACA in 2010. Critics, including industry lobbyists, called it a job and research killer.

Proponents said it was a way for the device industry to pay its share of a health reform bill that would add newly insured patients to the device market.

Some argued that companies would simply pass the cost of the tax along to patients in the form of higher device prices. Cogentix CEO Darin Hammers said competition in the med tech sector has often kept that from happening.

"That was the big threat [when the tax was first enacted], is that it would get passed along," Hammers said. "But the problem is, it's a very competitive space so it's difficult to pass it on to the end user."

The tax took effect in 2013 and generated more than $5 billion in federal tax revenue until it was suspended, for two years, at the end of 2015.

The House passed a bipartisan bill, sponsored by Paulsen, to permanently repeal the tax. The bill didn't pass the Senate.

The two-year moratorium was meant to give the House and Senate a chance to work out differences.

Democratic Sens. Amy Klobuchar and Al Franken voted for the tax in 2010 as part of overall health care reform, but both later supported efforts to repeal the device tax.

On Dec. 18, Klobuchar co-wrote a letter with Sen. Joe Donnelly, D-Ind., urging Senate Majority Leader Mitch McConnell and Minority Leader Chuck Schumer to address the device tax before year's end. Klobuchar noted the problems that companies in Minnesota and across the country are experiencing with unexpected expenses related to the possible reinstatement of the tax.

With payments due every two weeks beginning Jan. 29, Klobuchar told the Star Tribune that she will continue "working with Senate leaders on both sides of the aisle to repeal or suspend this tax this month."

Franken resigned from the Senate. His replacement, Tina Smith, said in a statement that she will support repealing the tax.

"I am committed to working with my colleagues in Congress on policies to ensure that our inventors, small businesses, and high-tech workers can continue to innovate," Smith said. "I'll be pressing to find a sensible repeal of the medical device tax in the weeks and months to come."

Paulsen said he will continue to explain to his colleagues that the device tax is different from other ACA taxes that do not have to be dealt with immediately.

"This is the only tax [funding ACA] that is an excise tax," he said. "It is collected on a regular basis where the companies have to figure their sales and send a check to the government."

Herbert believes that approach is not only inappropriate but self-defeating for the country and the device industry generally, especially to smaller companies with good ideas that have not yet grown profitable.

"In essence," he said, "I'm taking investment dollars intended to grow a company and create jobs and create access for patients to new technologies, and using that to pay a tax."

Jim Spencer • 202-662-7432

Joe Carlson • 612-673-4779