Tom Loarie of Mercator MedSystems on the Coming Obamacare Tax on Medical Devices
HH: This segment, I do want to call your attention to a different piece of news, one that will actually be finished or not finished in the next two weeks to the great detriment of American working people. And that is because a tax is headed towards America’s medical device manufacturers on the first day of the new year, part of Obamacare, Section, I believe, 2141 of the IRS code. I’ll have to go look that up in particular. But joining me to talk about it, because there’s a chance it could get repealed, is Tom Loarie, who’s the CEO of Mercator MedSystems. Tom, welcome, it’s great to have you on.
TL: It’s good to be on. Thank you for giving me some time to talk about this critical issue.
HH: It’s Section 4191 of the IRS code, and would you explain to people how it works, Tom, because there’s a push by Democratic Senators, and of course all the Republicans, to get this thing repealed. But the President is saying no way, he needs the money.
TL: There’s going to be, beginning on January 1st, a 2.3% tax on revenues that’s non-deductible for all medical devices sold in the United States.
HH: And so that’s going to hit every artificial joint, every implant, every everything, right?
TL: Well, it’s every everything, and it will be, when you think about, it’s targeted right now to raise about $30 billion dollars in taxes. Initially, it was going to be $20 billion. Now think about that when you compare it to $10 billion dollars that’s being spent on R&D in this industry. And I get frustrated at times with what goes on in D.C., because people believe the medical technology, or medical device industry, is this behemoth industry. And I’ve taken exception to some of the framing that some people have done on TV recently. Our total industry, from a global standpoint, is only $300 billion dollars. The U.S. provides 40% of that for the world. We are a net exporter of product. But when you compare that to pharma, which is $643 billion, or an Exxon, which alone is $487 billion, we’re just really a small industry from a global standpoint.
HH: I was talking last night, Tom, with my friend, Norm, who’s also in your business, very successful inventor and now senior executive with a Texas company, told me that the average R&D budget of a medical device company is 5%, and that if you, you just have to take off of that 5% the 2.3% that’s going to be laid down. It’s devastating to your industry.
TL: Well, and that’s 5% for the more high-tech companies. When you get into Band-Aid manufacturers, and I could go down…and this is everybody from Band-Aids to CAT scans to pacemakers, it actually averages less than that. And so take a company, for instance, I’ve been involved in new products for the medical device industry since the early 70s. Right now, I’m involved in an area that’s focused on the $300 billion problem. Think about this. The $300 billion problem of medication compliance, which has added to the health care burden, and this kind of a product will be penalized. I’m also involved in point of care testing which will increase access to lab testing at a much reduced cost. And then the one thing I really want to spend some time on is I’m involved primarily in a therapeutic company developing treatments for malignant airway obstructions, which are concurrent with lung cancer. 50% of all lung cancer patients die because of obstruction of the airway. We’re also applying our technology to peripheral artery disease, which leads to amputation and coronary disease. Now this company, we’re going to be selling product next year. We’re cash negative. So on our sales, we’re going to pay two and a half percent, which is cash that could be coming into the company, that we’re going to have to pay out to the government, which puts us in a tricky position, because we are then reliant on outside investors to continue funding our company. And in the environment that we’re in right now, with 40% of the venture capitalists have imploded, it’s very, very difficult to get funding. So what this translates to, and I’m sure this is what your friend was talking about, is a lot of young companies are going to get, are going to go out of business or find other things to do. And I’ll tell you, one of the other things to do is the Chinese are very active here in Silicon Valley looking for technology to export to China. They have a goal of becoming a world leader in medical technology by 2020. And they’re shopping around. And the more we’re getting squeezed on being able to raise capital and bring new products to the market, the more it’s going to be easier for the Chinese to provide financing just to buy the rights to these products. So in many ways, we are exporting our technology, and we have, really, since 1990, to other countries. And we’ve had several problems. One has been the increasing cost of going to market and the regulatory burden, the pricing by CMS, which is Medicare…
HH: What about tort reform? I mean, the lack of tort reform has got to…
TL: Tort reform, I’ve been involved in that. I took the first company outside the United States to do clinical research in 1990. And today, if you were to go and try and raise money for a company, if you’re not going outside the United States to do your clinical research, you would not get funded. Now that leads to putting manufacturing outside. Now why are we doing that? Because getting to do our clinical studies in the United States has gone from a $20 million dollar bill to over $100 million dollars. So you’re looking for other places to go where you can reduce costs. For instance, in China, you can do a clinical research study in half the time for a third the price.
HH: Now Tom Loarie is my guest. He is the CEO of Mercator MedSystems up in Northern California. We’re talking about the January 1 schedule for a 2.4% sales tax on all medical devices, except a very couple of few have been exempted from this like eyeglasses and hearing aides, because they didn’t want to upset senior citizens. But Tom, one of the things I’m sure many in the audience are wondering about is why don’t you just pass it along to your customer? It’s a sales tax. This can’t really, you guys aren’t going to pay this. Why not just pass it along? What’s your answer to that?
TL: Well, my answer to that is you’ve got a thing called CMS, which sets the payments for procedures and reimbursement. And we’ve got it capped. There’s nowhere to move. And as a result of that, you can’t just pass it on.
HH: That’s important for people to understand, because this is why it’s going to hurt job production in the United States, is they have to pay it, but they cannot get it back, and you cannot make it up on volume, either, Tom, because you’re getting it taxed on every device. Now yesterday, President Obama was asked about this, because 18 Democrats sent him a letter in the Senate, including Al Franken of all people, because Minnesota is obviously involved in medical technology quite a lot, asking him to delay this. And he said no, not going to happen. Have you and your colleagues in the medical device industry given up on making part of the fiscal cliff negotiations include a suspension or a repeal of this?
TL: Well, what happened going back to the beginning is that President Obama invited all of the trade association presidents to join him at the White House, and they asked for everybody to put something on the table. Now the medical device industry is made up of thousands of companies, not a small number like pharma, the hospital side. We have thousands of companies. 80% of these companies have fewer than 50 employees. 98% less than 500 employees. 400,000 total people working in the United States. These trade associations for, and not…and the trade association only represents about a quarter of those companies, because most of these companies can’t even afford to be paying dues to the trade association.
TL: So when they went in, our leaders, our trade association leaders, said we can’t do that. These are small companies. We can’t tell them and dictate to them that they’re going to have reduced sales and reduced prices. And they won out. Well, when this ended up in committee, this tax was added as a punishment because we would not put something on the table as an industry. And we’re a small potato. Now pharma gave up something, everyone gave up something, but we couldn’t give up something. It’s a very different industry with a very different make up. And as a result, this tax was added to be punitive. Now the President in the thing that was released yesterday talked about gee, you’ve got 30 million more people, so you’re going to have all these other sales. We have not seen any kind of a windfall as he thinks we’re going to see in Massachusetts, which has this type of program. There just is not windfall. So essentially, the money’s going to come out of the pocket of these small companies. A number of them have already announced that they are not going to expand. Some of them are going out of business. And some of them are bigger companies have announced layoffs.
HH: It is a job destroyer, and Tom Loarie, thanks for bringing it to our attention. We’ll check back with you between now and the day that it goes into effect. And if you’re listening, America, and you care about job creation in America, give a call to your Democratic Congressman and Senators and urge them to support the inclusion of the repeal of this. It is that vital. I’m talking tens of thousands of jobs in the medical device industry will be destroyed by this 2.4% sales tax put in to punish the industry during the Obamacare negotiation. Tom Loarie from Mercator, thank you, my friend.
End of interview.