Central MA Med-Tech Leaders See Big Job Cuts From Obamacare Tax

Thursday, October 10, 2013

Steven Jones-D'Agostino, GoLocalWorcester Business/News Contributor

A 2.3% excise tax on medical devices as part of the Affordable Care Act may hurt the Central MA med-tech business more than it helps.

Mitch Sanders is nearly beside himself with outrage. His Worcester company is developing medical devices that could improve – if not save – lives of countless people across America and throughout the world. Yet Uncle Sam is now taxing the very products made by his firm - and other businesses like it, across the country.

For more than a decade, Sanders and his team at ECI Biotech in Worcester, of which he is founder and CEO, have toiled to research and develop a diagnostic infection sensor, called ExpressDetect, that can be incorporated into any medical device or consumer product. The device, according to ECI, “will ultimately transform the way pathogens are detected in wound care, women's health, baby care and oral care.”

ExpressDetect sensors are currently being tested in the clinic, for investigational purposes only, and are not yet approved for use by the FDA. But if and when they are, they could – in addition to benefiting medical- and health-care treatment – mean good jobs at good wages for plenty of Central Mass. people.

Good stuff, right? A key med-tech device, innovated right here in Central Massachusetts’ own backyard. There’s just one hitch – FDA approval, aside – and it goes by the name “Obamacare.”

Known legally as the federal Patient Protection and Affordable Care Act, it imposes a 2.3-percent excise tax on makers of medical devices. Exempted, are eyeglasses, contact lenses, hearing aids and other devices that are generally purchased by the general public at retail, for individual use.

Because Mass. has the second-largest med-tech sector in the U.S. – behind California – the impact here is profound. Just before the excise tax took effect this past January 1, Sanders recounts, “just about every medical-device company [in the country] had layoffs. It really hit us hard, locally.”

At the time, Sanders recalls, ECI was working on a major orthopedic device, and he received a phone call from the project’s senior director informing him that the entire research group had been downsized due to the excise tax. “What you’re seeing [since then] in the medical-device industry is very little growth at all,” he says, adding, “A lot of my colleagues lost their jobs this past year because of the medical-device tax.”

Last March, 33 Democratic U.S. senators voted for a non-binding resolution to repeal the medical-device excise tax. They included the Bay State’s senior senator, Elizabeth Warren.

In an April 2012 editorial for Mass Device, Warren, then a candidate for Senate, wrote, “Investments in a better FDA, in fairer tax laws, and in research and development are critical to a strong medical technology industry and a strong economy. As a Commonwealth and as a country, we must strive to be the most innovative place in the world – but we will only achieve that goal if we dedicate ourselves to creating a climate for innovation. It is up to us here in Massachusetts to lead the way.”

Even so, Worcester’s congressman is not ready to call for repeal of the medical-device tax. Democrat Jim McGovern expresses a willingness to push for repeal of the tax - once Washington, DC gets out of government-shutdown mode. But the solution, he maintains, would need to be “revenue-neutral.”

A great economic engine

A little more than a year ago, the Bay State’s medical-device industry executives sounded hopeful. They told their statewide industry group they expected business to improve in the coming months. And more than half of the 42 C-level execs reported having increased staffing levels during the previous six months.

Those were among the findings of a 2012 survey by the Massachusetts Medical Device Industry Council. MMDI is an organization of more than 350 manufacturers, suppliers, research institutions and academic health centers that promotes the interests of the Bay State’s growing medical-device sector.

According to a 2011 study by Deloitte, the more than 400 med-tech firms doing business in Mass. in 2008 employed a total of 24,300 people - nationally, the sector employed 392,300. And a 2010 report by The Lewin Group estimated the spin-off – or economic-multiplier - effect of the industry in Mass. to be 82,500 additional jobs in related industries.

In 2008, according to the Lewin Group, the entire U.S. med-tech sector had the following direct benefits to the national economy:

Employed 422,800 workers
Paid $24.6 billion in earnings
Shipped $135.9 billion worth of products

Those figures showed an increase of 12.5 percent, 11.4 percent and 11.6 percent, respectively, over 2005 data.

These days, Mass. and U.S. med-tech execs were singing a much different song. According to an MMDIC analysis, The 2013 MedTech Industry and Innovation Study, “Nearly half of the 123 [Mass.] med-tech companies surveyed also indicated that they have executed or are in the process of planning workforce reductions in response to the full implementation of the new federal medical-device excise tax.”

The takers of the MMDIC survey reported the following actions resulting from the implementation of the federal medical-device excise tax:

43 percent have taken action or have discussed plans for workforce reductions
Nearly 40 percent have executed or are developing plans to reduce R&D spending
A third of respondents have or are making plans to move manufacturing offshore

Worcester’s ECI Biotech is not among the Bay State med-tech firms looking to take such actions. Because Sanders’ company is awaiting FDA approval of ExpressDetect, he indicates that it’s maintaining status quo - living off $7.3 million in angel investments and $17 million in development funding and partnerships.

Still, Sanders is worried about the impact of the excise tax on ECI Biotech once it goes to market with ExpressDetect. “But we need to get to [ExpressDetect] launch – we need to get to [product] revenue, and so we’re going to hunker down and we’re going to make it through this,” he says. “This year was a really tough year. Development funding was a third of what we normally have. But we’re going to be okay.”

A devastating industry impact

In fact, the medical-device tax is impacting Mass. “disproportionately,” according to MMDIC CEO Thomas Sommer, who has headed the Council since its inception in 1996. While the med-tech sector is spread pretty evenly across all parts of the country, he observes, it’s clustered in California, Minnesota and Mass., which has about 400 such companies.

Sommer points to a Pioneer Institute policy brief, First, Do No Harm: The Impact of the Affordable Care Act on Massachusetts’ Medical Device Industry, that was released last April. The report estimated that the medical-device tax liability for this year will be more than $422 million for the 19 largest companies in Mass.

“Because this is an R&D-intensive industry, it will have an impact on our state’s and on our nation’s standing as an innovation leader in this one industry,” Sommer says. “This is a much-sought-after industry. States and other countries are looking to develop it.”

He goes on to report that the med-tech sector “improves the quality of health care and gives doctors and health-care providers new tools to work with, and [gives] patients access to these new tools. [It is] also a great economic engine because there’s manufacturing involved, the supply base has to be robust and has to provide access to injection molders and wire-spring manufacturers and electric-circuit-board manufacturers.

In short, Sommer adds, medical devices “are labor-intensive and the industry generates a pretty significant economic multiplier.” Citing the Lewin Group spin-off estimate for Mass., he notes that 3.4 additional jobs are created in related sectors for every one job created in the med-tech sector.

Echoing Sanders, Sommer bemoans the R&D spending cutbacks, manufacturing off-shorings and staffing reductions by Bay State med-tech firms as a result of the medical-device excise tax. “In order to make up for the cost of this tax … and satisfy shareholders … , there need to be cost reductions elsewhere,” he says. “You can’t reduce the cost of compliance with federal FDA regulations, and you can’t reduce other fixed costs – materials, etc. So you’ve got to look at discretionary spending ... that can be curtailed and not impact operations.

“Long-term, I think this is going to have a devastating, if [the excise tax] continues [to be imposed] on this industry,” Sommer says. “This industry is a net exporter – we export more medical products than we import, in this country. We’re a world-leader [in medical devices, and] we still manufacture [the devices] here, in the United States, in many cases. FDA approval is the gold standard around the world – American medical-device products are highly sought after – and yet we’ve mixing health policy with tax policy. It’s going to take its toll, eventually.”

It would be one thing, Sommer observes, if most of the tens of millions of people signing up for Obamacare were in need of medical devices. But most of them are younger people, who, he notes, “are not having their hips replaced [or] coronary stents placed [or] implantable defibrillators [inserted]. The great bulk of what is sold [in the way of medical devices] to hospitals, is used for an aging population – unlike pharmaceuticals, which are [used] across the [demographic] board.”

America spends about $2.5 trillion a year on health care, and a 2009 Thompson Reuters study estimated that about 30 percent of that is wasted – and that’s just on the clinical side. A major reason: The U.S. spends too much on caring for people after they get sick, and not enough on preventing people from becoming sick.

If Obamacare moves America much more in the direction of wellness care – and away from sick care - could that mean big business for the med-tech sector? After all, according to Sommer, the “great majority” of medical devices are now being used on people with either a chronic illness or in need of surgery.

Medical devices “certainly can be made for prevention in things like patient monitoring – and that’s sort of a trend,” Sommer adds. “But it remains to be seen [whether that will really happen]. So much of what we are dealing with now, with this [excise] tax, we’re not really going to know [the full impact] until the end of this calendar year, after we’ve had one full year [of the tax] under our belts.”

What’s really needed, Sommer says, is a “paradigm shift” that causes med-tech companies to develop new medical products that “provide high-quality outcomes. And this, he adds, needs to be done in a way that “helps to reduce costs.” An example, he says, would be a device that reduces length of hospital stays as well as hospital-related labor costs.

“The medical-device companies are aware that this paradigm shift is taking place in our health-care economy,” Sommer says. “Despite the [medical-device] tax and despite their continued opposition [to it], they are working to design and manufacture products that work within the new [national health-insurance] system.”

To drive home this point, Sommer cites a study released last month by the Advanced Medical Technology Association, titled Recent Average Price Trends for Implantable Medical Devices, 2007-2011. The authors found that “the reported average price for each type of implantable medical device studied declined during this period, both on a nominal and inflation-adjusted basis. Using the medical-care CPI, we calculate the decline in inflation-adjusted prices to be from 17 to 34 percent, depending on the device category.”

A losing bet

Kevin O’Sullivan has been around med-tech and politics for a long time. He’s president and CEO of the Mass. Biomedical Initiatives, based in Worcester, and served as a Democratic state representative from Worcester between 1986 and 1994. Like Sommer – and for much the same reasons – he opposes the medical-device tax.

“I’ve got to think that Jim would be against it,” O’Sullivan says, referring to U.S. Rep. Jim McGovern (D-Worcester), “because certainly it affects Massachusetts - and it affects his district, directly. I don’t know [for sure], but if I was a betting guy, I would say Jim’s against it.”

Advice to O’Sullivan: Avoid the casinos and slots headed the Bay State’s way. GoLocalWorcester contacted McGovern’s office on Day 9 of the infamous federal-government shutdown. We wanted to know whether he’s taking any action to help repeal the medical-device tax. The answer: Not yet.

A spokesman for McGovern states that the congressman “does not support including a repeal of the medical-device tax in either the short-term Continuing Resolution or in the effort to lift the debt ceiling. He supports a clean up-or-down vote on both. He continues to be open to the idea of repealing the medical-device tax if there is a reasonable alternative to replace it in a revenue-neutral way, which we haven’t seen so far. And the Dent-Kind proposal to repeal the tax doesn’t meet these criteria, either. The ‘pay-for’ in the bill is a short-term, gimmicky proposal that would actually add to the deficit in the long-run.”

Until federal politicians come to their collective senses on the government shutdown, look for Mass. medical-device companies to continue paying a 2.3-percent excise tax. And look for leaders of one of the Bay State’s rising economic engines and job providers to continue taking blood-pressure meds as they await the return of reason to America’s Capitol.

Steven Jones-D'Agostino is chief pilot of Best Rate of Climb: Marketing, Public Relations, Social Media and Radio Production. Follow him on Twitter @SteveRDAgostino.