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Diagnostic Industry Expects R&D Spending Boost if Med Device Tax Is Repealed


NEW YORK (360Dx) – Diagnostic company executives are eagerly anticipating the repeal, which could come as early as this year, of a 2.3 percent excise tax on medical devices established in 2010 as part of the Affordable Care Act.

The tax was levied against all FDA-listed diagnostic tests and devices intended to diagnose a disease or condition and went into effect in 2013; the tax did not apply to OTC products, such as pregnancy tests. It was imposed on device and diagnostic sales between 2013 and 2015 but has been suspended twice since then.

Legislation currently backed by members of both political parties has sought to repeal the tax, a move that diagnostic industry participants believe would aid future innovation and job creation.

Earlier this summer, 57 Democrats in the House joined 226 Republicans to approve the Protect Medical Innovation Act, which would permanently repeal the tax. While it is not certain the Senate will vote on a repeal before the mid-term elections because of competing priorities, the House vote has boosted the hopes of the med device and diagnostics industries.

"We need 60 votes in the Senate, and the House vote demonstrated more bipartisan support than we've seen in a long time," said Doug Bryant, president and CEO of diagnostics firm Quidel who also serves as chairman of the board of directors for diagnostics lobbying and advocacy group AdvaMedDx. Bryant added that AdvaMed, the medical device industry’s lobbying group and parent organization of AdvaMedDx, was instrumental in securing passage in the House and is optimistic about gaining 60 votes in the Senate.

AdvaMed President and CEO Scott Whitaker has said both Senate Majority Leader Mitch McConnell (R-Ky.) and Minority Leader Chuck Schumer (D-NY) have expressed “a willingness to act,” perhaps not before the mid-term elections but by the end of 2018.

If the Republicans lose control of the House or the Senate, McConnell will seek to move the legislation through the Senate by December to claim credit for the Republican Party, said a veteran lobbyist familiar with the process. However, if Republicans maintain control of both chambers, McConnell might delay the bill in the Senate for more bargaining power on other issues in 2019. But, the bill would pass easily in the Senate this year, added the lobbyist.

Repealing the device tax would result in a loss of revenue intended to fund the Affordable Care Act, according to the Center on Budget and Policy Priorities (CBPP), a left-center think tank. Rep. Bill Pascrell (D-NJ) agreed with the CBPP at the time of the vote, noting the ACA was designed to pay for itself to prevent increasing the deficit.

Paul Van de Water, a senior fellow at the CBPP, contends a permanent repeal would cost the government $26 billion between 2015 and 2024, citing a study by the Joint Committee on Taxation. And the Congressional Budget Office provided an estimate that federal revenues would decline by $20 billion over the next 10 years if the tax is repealed permanently.

Van de Water and the CBPP also argue that the expansion of health coverage increases the demand for devices and diagnostics, consequently offsetting the effect of the tax on manufacturers. If the tax is repealed, Van de Water contends other industries and interest groups would push for tax cuts to benefit themselves, thereby decreasing collected tax revenue.

"If the repeal becomes permanent, we'd increase hiring,” said Tom West, president of the Diagnostic Solutions Division of Hologic, a maker of medical devices and diagnostic instruments and tests. For publicly traded companies, which in particular need to be mindful of profit and operating margins, the tax has influenced R&D spending, said West.

He cited the Zika virus outbreak of 2015-16 as a good example of the impact of the tax. The US Centers for Disease Control and Prevention encouraged a rapid response by researchers to halt the spread of the virus. West said Hologic and other companies were understaffed at the time, primarily because of the tax. Had the tax not been in effect in previous years, the diagnostic industry could have mounted a more comprehensive response, said West.

AdvaMed commissioned a non-profit group, the American Action Forum (AAF), to assess the impact of the device tax since 2013, went it first went into effect. The study by the AAF, which describes itself as a center-right group, examined tax revenue and job losses between 2013 and 2015, the years that the tax was in effect. In 2015, the government forecast called for collecting $2.85 billion in revenue from the med device tax, but actual collections totaled only $2.1 billion, according to the Office of Management and Budget. The shortfall of projected tax revenue likewise occurred in 2013 and 2014, totaling approximately $1.3 billion.

To the AAF, the shortfall suggested that the med device tax had hampered innovation and marketing, which led to lower revenues and job losses.

The original projections from AFF for cumulative job losses in the industry were around 10,900 for 2013-2015. However, the Census Bureau reported the actual cumulative job losses during the three years were 28,800.

The AAF prepared the study in late 2017, when employment data was not available for 2016. Had the suspension of the tax not been approved for 2018, the AAF forecast that medical device and diagnostic revenue and employment would resume their decline. The AAF also forecast an additional loss of 25,000 jobs by 2021.

However, if the tax is permanently repealed, the AAF forecasts that the 28,800 jobs lost when the tax was in effect will be recovered within three to five years.

"Knowing the repeal was permanent, we would continue to hire more,” said Hologic's West.

Bryant noted that because the tax is on revenue, not profits, it hits smaller companies harder because it pushes out their timeline to profitability.

Quidel, which has been around for decades and has a market cap approaching $3 billion, would have been seen its revenue reduced by $6 million if the tax not been suspended for 2018, he said. With the suspension, Quidel is now hiring more lead scientists, but the decision to hire more workers is still regarded skeptically by analysts and investors because the tax is expected to resume in 2020, he added.

For private diagnostic startups, the effect on employment may not be as severe, but there may be a correlation with investment, said Bryant. Because larger companies are unable to invest and acquire innovative startups, venture dollars flowing into the diagnostics sector declines, he claimed.

Alex De Winter, managing director of GE ventures, agrees with Bryant on the recent impact in startup funding.

"Investment in diagnostics companies has historically been anemic due to challenges in reimbursement and the exit market. The proposed 2.3 percent medical device tax would exempt many diagnostics startups (those with laboratory developed tests), but for the remainder …       it would add another impediment," said De Winter. "GE Ventures supports the repeal of the medical device tax because it diverts funds that could be used to support R&D and negatively impacts innovation and job creation."

De Winter said GE Ventures plans to keep selectively investing in innovative diagnostic platforms, pointing out that an estimated 70 percent of all clinical decisions ultimately are based on diagnostic tests.

Moving tests into the market, however, remains a rocky road for a diagnostic startup, he noted. "It's difficult for companies to get funding, it's difficult to develop the test, and it's a long process to get the test approved," said De Winter. A subsequent tax on the test revenue after it reaches the market adds another hurdle to introducing new diagnostics, he said.