Device Makers Weigh Costs of Health Care Reform

San Diego’s medical device makers made last-minute pleas to lawmakers last week to stop a proposed excise tax on their products to help pay for health care reform.

The medical device excise tax, a 2.3 percent levy included in the federal health care overhaul law signed by President Obama, would apply to everything from stents to flu test kits starting in 2013. The provision is expected to raise $20 billion in a 10-year span to help pay for health care reform. In return, some device makers said they anticipate reaching newly insured customers.

But many of San Diego’s small device makers contend that it puts an unfair burden on young companies and “stifles innovation,” iterating similar statements by industry trade groups and lawmakers opposed to the measure.

“This tax will adversely effect the life-saving innovation that smaller, high-growth companies like Volcano develop that positively impact the health care system,” wrote Scott Huennekens, CEO of Carmel Valley-based Volcano Corp., in an e-mail last week.

Volcano, a 900-person global company with 50 employees at its San Diego corporate headquarters, makes products that allow cardiologists to get a clearer picture of what is happening inside the coronary arteries, where plaque can build up and cause heart attacks. Its colorized technology also helps guide surgeons in placing drug-eluting stents.

“Unlike CT scans and MRIs, Volcano’s technology is used during invasive procedures and reduces health care costs by enabling physicians to better define the appropriate course of treatment for their patients, decreasing the number of costly and unnecessary procedures, repeat hospital visits and, most importantly, mortality rates,” Huennekens said.

San Diego stakes a claim as a major hub for medical device makers with dozens of big-name companies and hundreds of small startups testing everything from glucose monitors for diabetes to test kits for sexually transmitted diseases. Bud Leedom, a San Diego analyst who keeps track of local stocks for the monthly California Stock Report, said most local companies have been assessing their balance sheets and planning for the tax.

“Barring any repeal or change in status, this is something all companies will have to contend with,” he said.

Unknown Impacts

But any future impact to their business is largely unknown, and industry leaders are predicting varying results.

Most of Volcano’s sales — $227.9 million last year — originated outside of the United States, in countries like Japan. Other medical device companies that derive the majority of their sales domestically anticipate the tax would have an even greater impact on their balance sheets.

San Diego-based spinal device maker NuVasive Inc. receives the majority of its revenues — which totaled $370 million last year — from disposable tools and grafts used to perform a minimally invasive lateral back-fusion surgery. CFO Michael Lambert contends that the procedures save health care costs by helping patients recuperate faster.

“We are innovating with the faster, better, cheaper technology, which is really driving down the health care cost overall,” he said. “It doesn’t make sense to do anything but nurture a company like us, rather than tax a company like us.”

Almost all of NuVasive’s sales are in the U.S., but Lambert said the company plans to expand into key markets in Europe and Asia. That, he said, could help soften the blow when the excise tax takes effect a few years from now.

“Over time, we believe we’ll start to catch up, meaning the impact will be a bit more neutralized given our international growth,” Lambert said.

International Sales Buffer

For San Diego sleep apnea device maker ResMed, a 2,900-person global company that sells products in more than 70 countries, domestic tax burdens could have less effect on the company overall since roughly half its revenues come from international sales. Global general counsel David Pendarvis also said that reimbursements are stronger outside the U.S.

“Obviously we prefer to have no tax, but given the two alternatives on the table today, we support the reconciliation proposal,” Pendarvis said.

It’s too soon to gauge how many more customers ResMed might bring in as a result of increased coverage to the uninsured, but Pendarvis said he anticipates the company will benefit. Its devices, he said, have been shown as an effective tool for combating the harmful effects of sleep disordered breathing, such as hypertension and lost productivity.

“If you’re bringing more people under insurance, or under some form of reimbursement, that should remove any economic disincentive,” he said.

Terrance Gregg, CEO of diabetes management device maker DexCom Inc., said the company’s board met last week to weigh the latest implications of health care reform. DexCom has introduced a series of continuous glucose monitors to the market in recent years, but has yet to make a profit.

Analysts anticipate it will reach profitability just before the excise tax takes effect in 2013. Last year, the 320-person company had sales of $18 million. Gregg said DexCom expects to double its product revenues this year.

Despite its growth, Gregg said the company anticipates it will have to scale back as a result of the excise tax.

“Some of the things we normally will have invested in, we will delay our investment in,” he said.

But Gregg said the company could save additional lives by introducing the product to new customers now covered by insurance under the health care legislation.

DexCom, Leedom said, could also benefit from a change in insurance rules that eliminates pre-existing conditions such as diabetes as a reason to deny health insurance coverage for children. The move, he said, could increase the number of insured children who use glucose monitors to manage their Type 1 diabetes.

Only a portion of the 32 million uninsured eligible for future coverage will require the device, though, and not everyone will choose DexCom’s device.