BUSINESSJanuary 25, 2013, 6:35 p.m. ET
Device Makers Add Fees to Cover Health Tax
By CHRISTOPHER WEAVER
Some medical-device companies faced with a new tax meant to help finance the health law are hoping someone else will pick up the tab: their hospital customers.
Companies including feeding-tube supplier Applied Medical Technology Inc. and respiratory-valve maker Hans Rudolph Inc. quietly added new surcharges or warned hospitals of price increases to cover the new 2.3% tax on device sales that went into effect Jan. 1, according to letters and invoices from nine manufacturers sent to hospitals that were reviewed by The Wall Street Journal.
"As a result of this law, we will be forced to charge the 2.3% federal medical device excise tax to you," said a letter to hospitals from Cardica Inc., CRDC +1.28% a maker of heart-surgery tools. A senior Cardica executive declined to comment.
Hospitals executives say they are also footing the bill for the tax as they sign new contracts with higher prices and as companies discontinue older, inexpensive products in favor of more costly models. Executives for Applied Medical declined to comment. Hans Rudolph and other device makers didn't respond to requests for comment.
The device tax adds to manufacturers' costs in an era when hospitals have become more sophisticated negotiators and have driven prices down—and as demand for medical devices has softened after economic conditions slowed the growth in use of health services.
"It's kind of a triple whammy [for device makers], and it could come back to bite us," said Adam Robinson, contract manager at Beth Israel Deaconess Medical Center in Boston. Mr. Robinson said Beth Israel noticed a new 2.3% surcharge—labeled as a "medical device adjustment"—in a bill for radiology supplies sold by a small company. Procurement officials say they have seen the charges appended to commodity items sold by "mom-and-pop" outfitters.
Most devices are purchased under contract or through group-purchasing organizations, however, which could help hospitals push back against the charges.
Larger companies, such as Medtronic Inc. MDT 0.00% and General Electric Co.'s GE 0.00% GE Healthcare, haven't explicitly tacked on surcharges, said Mr. Robinson, who manages a $150 million supply budget, and other hospital supply-chain managers. He said he expects that, as contracts end, bigger vendors will seek to "bake it in to the contract renewals."
Medtronic said it expected the tax to cost $125 million to $175 million annually and said it would take funding away from other possible investments. GE said it plans to "manage the impact of this new expense just like any other expense."
As health-care businesses—and employers that cover workers' health costs—grapple with the new law, many are seeking ways to divvy out new costs stemming from the law. Device companies in particular have argued that their new tax, which applies to sales rather than profits, is unfair. Hospitals and drug companies face new costs, but in exchange will get a swath of newly insured patients, while device lobbyists argue that most of the patients who need devices are older and already covered by Medicare.
"This theory that there's going to be a windfall [of new patients for device makers] just doesn't hold water," said JC Scott, chief lobbyist for device group AdvaMed. The group has been pushing for repeal of the tax and hopes a new measure to end it will be introduced in Congress in the next few weeks.
Meanwhile, hospitals have argued that, because they had already agreed to give up $155 billion in the form of Medicare-payment cuts over 10 years to help pay for the health law, other sectors should also cough up their own share. "We're disappointed," said Mike Rock, senior associate director for federal affairs at the American Hospital Association. The group is lobbying the Internal Revenue Service to draft rules preventing device makers from foisting the tax on to their members.
Publicly passing on costs companies attribute to the health-care overhaul has become a rallying cry for some health-law opponents in other industries, too. Papa John's International Inc. CEO John Schnatter said at a shareholders meeting last summer that the health law would boost pizza prices by 11 cents to 14 cents per pie. And, a Denny's franchise owner in Florida threatened a 5% health-law surcharge to customers before public pressure, including from Denny's Corp.'s corporate offices, quashed the plan.
Insurers, too, have attributed premium increases paid by their customers to the health law. Aetna Inc. AET 0.00% Chief Executive Mark Bertolini said in December that premiums for a subset of small business customers could "go up as much as 100 percent."
Though the device surcharges noted on hospital invoices are sometimes tiny, the device tax could add up to big dollar amounts. Tampa General Hospital received a bill this month tacking $5.73 on to the cost of a $249 throat device to cover the tax. But, the 1,000-bed hospital buys about $114 million worth of taxable items a year, estimates Mark Campbell, vice president of materials management. The tax will generate $29 billion for the government's health-care overhaul by 2022, congressional budget forecasters estimate.
It might be harder for hospitals to spot cases where device companies raise prices to cover the tax, without explaining it on bills. Nevertheless, companies seen baking in the cost of the tax would feel "a very swift and vocal objection in the marketplace," said Pete Allen, senior vice president of sourcing operations at the hospital-owned group-purchasing organization Novation.
Device makers have also said they would cut costs with layoffs or reductions in research spending to help offset the impact of the tax. In November 2011, for instance, Stryker Corp., SYK 0.00% a maker of hip and knee implants, said it would lay off 1,000 employees in part to brace for the tax. Stryker didn't respond to a request for comment.
Some hospitals are warning device vendors that they won't budge on price, citing multiyear contracts that include fixed prices. "If out of nowhere, you come back with a 2.5% price increase, we're just not going to honor it," said Bill Matthews, vice president of supply chain at Lehigh Valley Health Network in Allentown, Pa.
—Jon Kamp contributed to this article.
Write to Christopher Weaver at christopher.weaver@wsj.com
A version of this article appeared January 26, 2013, on page B3 in the U.S. edition of The Wall Street Journal, with the headline: Device Makers Add Fees to Cover Health Tax.
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