Stalled GOP health plans leave device tax repeal unclear

WASHINGTON – At this point, a Republican health care bill that kills a medical device tax put in place by the Obama administration may be beyond the reach of the GOP. But in Minnesota, Bob Paulson and hundreds of other executives in the massive medical technology sector are planning business operations on the assumption that the device tax is dead.

Paulson, president of NxThera, a small device company financed with venture capital, is betting that Congress will declare a truce in its interparty and intraparty civil war long enough to keep him from paying a 2.3 percent tax on gross sales.

Paulson calls the levy "an abhorrent penalty" on small companies like his because "it is a tax on revenue, not on profit."

"The current expectation," he said, "is that it is not coming back."

Yet as things stand, collection of the medical device tax is only suspended until the end of 2017. Despite the device industry's seven-year investment of tens of millions of dollars in lobbying and campaign contributions to kill it, the device tax refuses to die.

The Advanced Medical Technology Association (AdvaMed) targeted the Republican initiative to repeal the Affordable Care Act (ACA) as the best chance to quickly and permanently end the device tax. The trade group, which includes most of Minnesota's major med tech companies, dutifully supported every version of the House and Senate health care bills that included repeal of the tax.

Now, with the Senate GOP health bill on life support, AdvaMed is hedging bets by looking for a less loaded legislative vehicle on which to hitch a ride.

"I'm frustrated," AdvaMed CEO Scott Whitaker said. "The med tech industry is frustrated, because if Congress doesn't do something, a tax increase is looming."

Whitaker mentioned placing a device-tax-killing amendment on an upcoming Senate bill setting fees that device makers pay to the Food and Drug Administration (FDA).

A spokesman said Sen. Al Franken, D-Minn., has no plans to offer such an amendment, focusing instead on lowering drug prices.

A spokeswoman for Sen. Amy Klobuchar, D-Minn., said that "in addition to a series of amendments to lower prescription drug costs this year, the senator will seek to include the permanent repeal of the medical device tax in legislation." As for "this particular FDA user fee bill, the underlying House bill did not include the permanent repeal of the tax and it is unclear how many amendments will be allowed when it comes to the Senate floor."

Franken and Klobuchar voted for the medical device tax in 2010 as part of President Barack Obama's signature ACA.

The Internal Revenue Service collected the tax in 2013, 2014 and 2015. It was supposed to net the U.S. Treasury an average of $2.9 billion per year over a decade. The IRS collected only $1.4 billion in 2013, less than half that amount, and said it was having trouble identifying companies that needed to pay.

The IRS collected nearly $2 billion in 2014 and another $2 billion 2015 for a total of $5.345 billion before the moratorium, IRS records show.

The latest budget estimates show repeal of the tax will remove $19.6 billion from the federal revenue stream from 2018-2026.

The House has passed multiple bipartisan bills repealing the tax only to have them founder in the Senate, where repeal was seen as an attack on the ACA. After 79 senators, including Klobuchar and Franken, cast nonbinding, symbolic votes opposing the tax, a two-year moratorium on collection was placed in the 2016 Consolidated Appropriations Act.

Most of those opposed to the tax believe it will never be revived. But the dysfunction in D.C. has some on edge. Many Minnesota businesses have already invested as if the device tax will never return, said Shaye Mandle, CEO of Minnesota's med tech trade group Medical Alley. "The impact if it did," Mandle said, "would be even more dramatic than it was when it came into effect in the first place."

Rep. Erik Paulsen, R-Minn., who led the charge against the device tax in the House, believes "the pieces will fall together." Paulsen said his latest House repeal legislation drew 256 bipartisan cosponsors. With the GOP health care plan in limbo, Paulsen pledged to try to "explore every opportunity for permanent repeal."

"Everyone recognizes this is bad policy," Paulsen said. He called killing the tax "a no-brainer." Then, he conceded that Congress always seems to push up against deadlines.

How much the device tax is hurting the device industry is still a matter of debate. Device makers say it has scared off venture capital and cost tens of thousands of jobs and millions of dollars in research and development. A November 2015 report by the nonpartisan Congressional Research Service, which analyzes policies for the House and Senate, faulted the structure of the tax but estimated "fairly minor effects … due to the small tax rate, the exemption of approximately half of output, and the relatively insensitive demand for health services."

How long the tax stays depends largely on how willing members of Congress are to work together for its repeal.

Mandle "cannot imagine a scenario where we get to January and Congress and the administration have not taken care of this."

As he considers linking device tax repeal to bills dealing with FDA fees, children's health insurance, overall tax reform, market stabilization or an "omnibus appropriations bill," Whitaker said he is "not prepared to accept a temporary extension [of the collection moratorium] at this point in time."

By year's end, though, Mandle, Whitaker and entrepreneurs like Paulson will begrudgingly take whatever they can get, including suspension rather than repeal.

"While we'd be grateful for anything beyond a tax increase," Whitaker said, "that's not the right health policy or tax policy solution."

Jim Spencer • 202-662-7432