Tax unites medical device industry and Minnesota’s lawmakers

paulsen at work
The repeal or delay of the medical device tax is a top legislative priority for Rep. Erik Paulsen.

“So many people are aware of it because it’s been in the news so often, it’s going to be right there again when we’re talking about the budget issues again in two and a half months,” Paulsen said.

“The 10 largest manufacturers have 86 percent of the sales covered by the tax,” said Topher Spiro, an analyst for the liberal Center for American Progress and a former congressional staffer who helped write the Affordable Care Act. He dismissed full repeal efforts, but said, “I think the tax could be even better targeted than it is. The big guys can definitely afford it.”

Lawmakers’ focus has been either a full repeal — Paulsen’s preference — or a delay of the tax, which Republican leadership pursued in the final stages of the shutdown fight.

Though that effort failed, repeal supporters say congressional support is growing. Paulsen’s bill has 266 co-sponsors — more than half the House — and Democratic Sen. Amy Klobuchar, who is helping guide the bill through the Senate and at one point pitched it as a shutdown solution, said she’s persuaded a handful of Senate Democrats to sign on to the effort. More than 30 Democrats — all of them Obamacare supporters — voted for a non-binding repeal bill in March.

Paulsen, Klobuchar and repeal supporter Sen. Al Franken all said the proposal could move forward either in budget negotiations over the winter or in a broader tax reform effort next year, assuming lawmakers can agree to both one of those larger packages and a way to offset the revenue lost by ending the tax (which is certainly not guaranteed).

“We’ve gained so much momentum to either have it now or have it in the larger budget discussions, which we want to have at the end of the year or in January,” Klobuchar said last week. “I think there is a lot of positive development on that front, no matter what bill it’s on.”

‘Plain vanilla constituent service’

Shaye Mandle, the COO and vice president of Minnesota-based tech group LifeScience Alley, said there is a two-fold lobbying effort underway to get the tax off the books: National groups lobby leadership and connected lawmakers in D.C. while groups based in states with a heavy tech presense — Minnesota, Massachusetts, etc. — focus on their delegations. Their efforts have won support from interesting sources: a handful of liberals like Massachusetts Sen. Elizabeth Warren have supported repealing the tax, as does the entire Minnesota House delegation, Twin Cities Democrats and all.

“For Klobuchar or Franken, you’d be surprised if they weren’t fighting to protect one of the major industries in Minnesota,” he said. “In a sense, that’s their job.”

Medical device industry contributions 2012

Top 20 members of the House

1Paulsen, Erik (R-MN)$113,350
2Camp, Dave (R-MI)$77,400
3Boehner, John (R-OH)$74,750
4Upton, Fred (R-MI)$63,000
5Matheson, Jim (D-UT)$61,246
6Donnelly, Joe (D-IN)$50,421
7Bilbray, Brian P (R-CA)$45,500
8Dold, Robert (R-IL)$44,250
9Boustany, Charles W Jr (R-LA)$42,055
10Pitts, Joe (R-PA)$40,750
11Kind, Ron (D-WI)$39,649
12Burgess, Michael (R-TX)$37,500
13McCarthy, Kevin (R-CA)$34,900
14Neal, Richard E (D-MA)$34,073
15Buchanan, Vernon (R-FL)$31,900
16Thompson, Mike (D-CA)$31,050
16Shimkus, John M (R-IL)$31,050
18Murphy, Christopher S (D-CT)$30,227
19Gingrey, Phil (R-GA)$29,500
20Becerra, Xavier (D-CA)$28,898
Source: Open Secrets

The industry spreads its cash around as well, and Minnesotans benefit: Paulsen received the most House contributions from the medical supplies industry last cycle, $113,000. Klobuchar ($90,000) was third among senators last cycle and Franken ($12,950) is the industry’s second-favorite senator so far this year.

Paulsen dismissed the donations in a Politico article last week, saying, “This is about saving lives; it’s about helping patients.” Jacobs said the industry’s tactics have been about par for the course.

“I think it’s the usual bag of tricks: it’s campaign contributions, it’s lobbying, the med tech industry spends a lot of time with Minnesota’s senators,” he said. “Just substitute whatever the favored state industry is and you’d see the same dynamic playing out in every state.”

Idea behind the tax

The basic idea behind the device tax — as well as those on pharmaceutical companies, hospitals and insurance companies as a whole — is that the Affordable Care Act would grow the pool of potential device users so much to warrant a new tax to help fund the law.

Top 20 members of the Senate

1Brown, Scott (R-MA)$165,850
2Hatch, Orrin G (R-UT)$140,249
3Klobuchar, Amy (D-MN)$90,025
4Casey, Bob (D-PA)$57,450
5Menendez, Robert (D-NJ)$49,138
6Stabenow, Debbie (D-MI)$41,150
7Baucus, Max (D-MT)$41,068
8McConnell, Mitch (R-KY)$39,000
9Barrasso, John A (R-WY)$38,750
10Hagan, Kay R (D-NC)$35,150
11Franken, Al (D-MN)$32,349
12McCaskill, Claire (D-MO)$31,200
13Corker, Bob (R-TN)$30,577
14Feinstein, Dianne (D-CA)$29,500
15Lugar, Richard G (R-IN)$28,250
16Brown, Sherrod (D-OH)$27,500
17Nelson, Bill (D-FL)$25,750
18Cornyn, John (R-TX)$23,500
19Gillibrand, Kirsten (D-NY)$23,150
20Snowe, Olympia (R-ME)$22,400
Source: Open Secrets

Companies and lobbying groups say they haven’t seen that higher demand yet, though they’ve had to pay the tax for more than 10 months. They argue the ACA is unlikely to grow a new base of device users at all — many who need the products are older and already covered by some type of health insurance.

But tax supporters say business should pick up once the bulk of the law, including the individual insurance-coverage mandate, kicks in down the road. They point to a much-cited Wall Street report that predicts the device industry will eventually recoup all of the tax’s expenses through increased demand for its products.

“You should start to see it this year once coverage gains steam,” Spiro said. “Enrollment this year isn’t going to be full projected enrollment under the law. Device manufacturers can expect revenue to slowly increase.”

Industry lobbying groups say there’s already a pressing need to repeal the tax, warning it’s hurt venture capital investment in medical technology and led to stagnant company growth and, in some cases, layoffs — Paulsen said there have been as many as 10,000 so far.

Mandle said big companies are shedding their research and development budgets and cutting positions while small companies have been unable to grow their businesses.

Minnesota impact

In Minnesota, med tech giants say they’ve already factored the tax into their business expenses. Medtronic told the Star Tribune it will pay up to $120 million because of the tax next fiscal year, on sales of $16.6 billion. St. Jude, which saw $5.6 billion in revenue last fiscal year, will pay up to $60 million.

A handful of smaller Minnesota companies say the tax is mostly delaying hiring. That’s the case for Clarus Medical, whose CFO, Randy Gatzke, said the tax is essentially a worthless expense for his company — he compared it to an employee who shows up and punches his time card, but who just sits around and refuses to work all day. The company tried to pass on the cost as a new line-item charge to its customers, but “the longer the year went on the less tolerant they became of it,” he said. “We’ve been eating that for a number of months here.”

Jennifer Ness said her company, Medsource, a 20-person outfit in Mound, is looking to expand its product development department, but it, too, has had to cover the cost since its customers won’t pay.

She also questioned whether Medsource would see any of the new device business promised by the law.

“Most of our products are for emergency medical services,” she said. “Emergencies aren’t going to increase just because everyone has health insurance.”

Joseph Schultz, the vice president of Nascent Surgical, said his company has struggled to attract new investors and said the tax may be pushing technology businesses out of the country (tax supporters say this fear is overblown, since the tax applies to the sale of all devices in the United States, foreign-made or otherwise). When foreign business groups have tried convincing Schultz and others to move off-shore, “it’s been pretty convincing,” he said. “I think if I were to start this thing again, I don’t think it would be in Minnesota.”

Devin Henry can be reached at Follow him on Twitter: @dhenry

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Comments (12)

  1. Submitted by L.A. Krahn on 10/22/2013 - 10:37 am.

    Boo-hoo crybaby device makers have a new tax.

    Try re-reading this article after checking out this op-ed by Topher Spiro in last week’s New York Times.

    Why not let Medicare and other payers negotiate device prices? Without those categorical cost controls, an excise tax is peanuts.

    • Submitted by Bob Petersen on 10/23/2013 - 08:35 am.

      A tax is a tax

      This is the same song that just because they have some money, they should pay for it. It’s a tax on gross sales so if a company loses money, they still have to pay the tax. This whole deal was just a money grab because of this lingering opinion that medical device companies are all fat on money, which is far from true. Instead of many high-paying jobs, the money goes to the government which is just wasteful.

  2. Submitted by James Hamilton on 10/22/2013 - 10:38 am.

    Eating the tax

    is a business decision.

    The company tried to pass on the cost as a new line-item charge to its customers, but “the longer the year went on the less tolerant they became of it,” he said. “We’ve been eating that for a number of months here.”

  3. Submitted by Paul Scott on 10/22/2013 - 10:47 am.

    Nice to hear from some outsiders here.

    So often these reports just parrot the projected job loss numbers coming out of AdvaPaulseChar, which have been disproved by and Bloomberg.

    That said, I don’t get why someone Larry Jacobs has to make it his job to parrot the same stale Beltway viewpoints i.e. “For Klobuchar or Franken, you’d be surprised if they weren’t fighting to protect one of the major industries in Minnesota,” he said. “In a sense, that’s their job.”

    No, not really. I’d say the Representative and Senator’s job is to attend to the quality of life of their constituents, of which the financial well being of a large employer is only one factor, and germane only as long as what that employer wants does not exceed what it contributes. By Jacobs simple reasoning, a coal state Senator pushing to allow mountain top removal is just doing their job. Is that what they call political science these days.

    I don’t think Paulsen and Klobuchar are getting all that much money to shape their views and I think they believe they are protecting a source of good jobs. But I also think they are incredibly naive about taking the industry’s word for what it can and can’t afford, not to mention its inflated sense of its role in the American economy and the state of American health.

    If the industry simply said we don’t want to pay this tax because we don’t want to, that would be fine, but they are saying and the representatives are passing along this patronizing argument that we need them to keep living in good health and that they have no role in the skyrocketing cost of health care, when in fact they are a major source of the problem.

  4. Submitted by Dennis Tester on 10/22/2013 - 11:09 am.

    So honest democrats

    are admitting that taxes on job producers is a bad thing. It’s too bad they don’t apply that philosophy to every company and individual, and not just those who give them campaign contributions.

    Next thing you know they’ll be opposing Obamacare in its entirety. Naaah.

  5. Submitted by Dee Ann Christensen on 10/22/2013 - 11:33 am.

    ‘Splain this to me!

    As a recent hip replacement recipient, I do not understand the logic of this excise tax reduction. A hip replacement currently costs approximately $350 to manufacture while medical device industries charge $13,000 and up for the replacement. And, as the population grows older, there will be additional replacements. Also the ACA coverage of additional patients means even more business for the medical device industry.

    I wish these politicians would listen to individuals as much as cash-cow medical device contributors.

  6. Submitted by Ron Gotzman on 10/22/2013 - 02:05 pm.

    Senator Amy K’s Flip- Flop

    I thought Senator Amy K voted in favor of this tax???

  7. Submitted by Ray Schoch on 10/22/2013 - 04:32 pm.

    I look forward

    …to Mr. Tester providing the name of that tax-free society he so fervently advocates, and better yet, telling us where it is.

    And while we wait … and wait… and wait… for that to happen, it’s not at all surprising to me to find the Minnesota Congressional delegation on board with the local medical device producers.

    Not surprising, but disappointing, nonetheless.

    It’s terrible public policy, parochial in the least admirable way, and represents yet another example of politicians of every stripe being willingly seduced by the self-serving lobbying efforts of the local industry, whatever that industry might be. Medical devices here, a defense contractor there, farm implement makers somewhere else. Mr. Scott and Ms. Christensen are right on target in their comments. All Mr. Schultz succeeds in doing with his comment about moving his operation offshore if he were starting over is proving (again, as if it were necessary) that corporations are amoral, have no vested interest in a democratic society, and have no particular loyalty to the communities they routinely invoke as reasons not to pay taxes.

  8. Submitted by Norm Mead on 10/22/2013 - 06:54 pm.

    Medical Device Tax

    Lets face it this is an industry that’s been overcharging for their products for decades. They’ve been living the large life and moving fast for many years. Their executives are paid out of this world salaries and live the dream. They can even afford to hire lobbyists and make big contributions to our elected officials to gain their support. It seems to me this is a fair tax on a high rolling industry that can afford to pay it. It’s purpose is benefiting the many who are much less fortunate. It’s time for our elected officials to start working for the people who elect them and pay a little less attentions to big businesses and wealthy patrons.

  9. Submitted by Tom Lynch on 10/23/2013 - 12:32 am.

    Is Paulson’s only reason for being in Congress to carry water for the medical device industry?

  10. Submitted by Connie Sullivan on 10/23/2013 - 03:07 pm.

    For Amy Klobuchar and Al Franken, the nose Minnesota medical device makers can raise against them, from the right, is enough for our senators to jeopardize the Affordable Care Act. Industry lobbying has been very successful with our two Democratic senators, who have not yet given a peep about what would replace the device tax to suppport health care insurance for millions of Americans.

    One of the faults with the ACA is that there is no Medicare out there, watching drug and medical expenses and refusing to pay the extraordinary high prices the device companies and hospitals and doctors charge (many people, because they’re not yet on Medicare, have no idea of the protection against gouging that Medicare provides).

    Medical device companies, if they’re on such shaky legs that this tiny tax–paid for by the patients, in the end–will do them in, are ready for the dustbin before the tax. Boo-hoo, is right.

    • Submitted by Ron Gotzman on 10/23/2013 - 07:13 pm.

      Who pays the tax?You are

      Who pays the tax?

      You are right – corporations do not pay taxes – people pay taxes (rich and poor).

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