December 9, 2016 / 11:09 AM / in 9 months

Under Trump, Congress likely to pull plug on medical device tax

U.S. President-elect Donald Trump speaks at the USA Thank You Tour event at the Iowa Events Center in Des Moines, Iowa, U.S., December 8, 2016. REUTERS/Shannon Stapleton

WARSAW, Indiana/WASHINGTON (Reuters) - When Donald Trump takes over as president on Jan. 20, one of the first business tax breaks he delivers is likely to go to the U.S. medical device industry and companies like Mark Throdahl‘s.

The chief executive of OrthoPediatrics Corp, based in northern Indiana, said his company has been able to hire more workers since the temporary suspension effective last January of a federal tax on medical devices. The tax was imposed as part of outgoing President Barack Obama’s signature 2010 healthcare law.

Throdahl said he hopes the incoming Republican-led Congress and president will permanently repeal the tax.

Trump and U.S. lawmakers are likely to do that, according to lawmakers, lobbyists and industry executives, in a step that also would help larger medical device makers such as Medtronic Inc, Boston Scientific, St. Jude Medical Inc and Johnson & Johnson.

Tax cuts are Republican gospel, and Trump’s new Republican administration is widely expected to make them happen.

The medical device tax may be one of the first on the chopping block. It was first imposed in January 2013 as a funding mechanism for the Affordable Care Act, dubbed Obamacare, a law that has brought medical coverage to millions of previously uninsured Americans. But Republicans hate Obamacare and this particular tax has powerful enemies in both parties.

Senate Republican Leader Mitch McConnell said repealing the Affordable Care Act, dubbed Obamacare, will be the first order of business in the Senate when it convenes in January.

Whether cutting taxes, including the one on medical devices, will deliver more jobs remains to be seen. The Congressional Research Service, a nonpartisan arm of Congress, said in January 2015, when the medical device tax was fully in effect, that it was having only “fairly minor” impact on production of devices and employment in the industry.

That may not matter much, as Republican lawmakers and lobbyists increasingly try to link tax cuts to job creation, perhaps sensing this connection will resonate with Trump, who made big promises in his campaign about restoring U.S. industrial employment.

The medical device industry, in its long-running assault on the device tax, is seeking to frame the fight as a jobs issue.

Immediately after Trump’s Nov. 8 election victory, industry lobbying group AdvaMed wrote to him and Vice President-elect Mike Pence, Indiana’s governor, asking for permanent repeal of the tax.

In the letter, AdvaMed President Scott Whitaker wrote, “The medical device tax has been a significant drag on medical innovation, and resulted in the loss or deferred creation of jobs, reduced research spending, and slowed capital expansion.”

Industry complaints like these led Congress last year to temporarily suspend the 2.3 percent excise tax on the sale of non-retail medical devices, such as pacemakers, heart valves and artificial hips. It had been in effect for only three years.

‘HEADCOUNT FREEZE’

OrthoPediatrics, founded in 2006, develops and markets implantable orthopedic devices, such as metal plates that can be attached to bones, to treat deformities and traumatic injuries in children. It has 60 employees in its Warsaw, Indiana headquarters, and 94 sales representatives around the United States.

When the tax was in full effect, Throdahl said, OrthoPediatrics “had almost a headcount freeze during 2015” because of the revenue that was siphoned away by the tax.

Since the tax’s temporary suspension, he said, “We’ve resumed an aggressive pace of hiring and investment.”

There are about 9,000 U.S.-based medical device manufacturers. The industry accounts for about 520,000 U.S. jobs and has $150 billion in direct sales, AdvaMed spokesman Mark Brager said.

Indiana is home to several device companies. So are Minnesota, California and Massachusetts. Lawmakers from these states helped push through the temporary suspension of the device tax.

Repealing the tax would further improve the already favorable tax profile of Medtronic, one of the largest U.S. medical device companies. Two years ago, Medtronic did an “inversion” deal, which is when a U.S. company shifts its home base to another country, at least on paper, to cut its tax bills. Medtronic is now technically based in Ireland, though it is still managed in Minnesota.

Asked whether Medtronic expects the tax to be repealed, company spokesman Fernando Vivanco said, “It’s much too early to speculate on future tax policy.”

Republicans said the industry has little reason to fear that the tax will ever return. Senator John Barrasso, a member of the Senate Republican leadership, said Obamacare repeal legislation will move next year in a way that will circumvent expected Democratic resistance.

“The plan is to move the entire piece that we moved last year,” Barrasso said, referring to Republican-backed repeal legislation that ultimately was vetoed by Obama.

“And it did include the medical device repeal, so I would expect that to be part of the list as well. It’s to repeal the taxes related to Obamacare,” Barrasso added.

J.C. Scott, head of government affairs at AdvaMed, said companies “feel a great sense of urgency in trying to get complete repeal done early next year, rather than later in the year, because companies need certainty.”

Repealing the tax would worsen the federal budget deficit.

“Any time you repeal a tax, that is a loss of revenue to the federal government,” said Jack Hoadley, a research professor at Georgetown University’s Health Policy Institute.

But this tax was never a big one, relatively speaking. When imposed, it raised barely $2.5 billion a year, less than expected. By comparison, federal tax subsidies to help people obtain health insurance under Obamacare in 2016 were estimated to be $660 billion, the Congressional Budget Office said.

Ever since the tax was put on hold, it has been viewed as endangered.

“At the time it was suspended, we were told by people in Washington that in all probability it will not be reinstituted. But still, we’ll all sleep better at night knowing that it’s gone,” OrthoPediatrics CEO Throdahl said.

Additional reporting by Caroline Humer in New York; Editing by Kevin Drawbaugh and Will Dunham

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