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Tax on medical devices is backbreaking to small businesses

As CEO of Precision Spine, a small medical device business, I do my best to envision the marketplace three, four or five years out. But the future is clouded by the still-uncertain impact of the Patient Protection and Affordable Care Act, known as federal health care reform.

We know there will be some positive outcomes from this bill. I applaud the portability of individual health insurance. I think parents are thankful to know that their children are covered under their current plan until they turn 26 years old.

However, there is a real danger to innovation in this plan. My industry — which employs 400,000 Americans — has been hit with a 2.3 percent excise tax on gross sales of medical devices since the law took effect Jan. 1. A tax like this drives up the cost of the products and diminishes the amount of money available for innovation.

In addition, our lawyers have had to scramble to understand how we follow this law, and our accountants and CFO say the rules for collecting this tax are far from clear.

This much is clear: the tax, along with the increase in regulation and the overhang of uncertainty surrounding this new health care law, has the potential to do significant harm to the medical device industry. In an industry where product approval can take years, this uncertainty threatens the future of innovative new products. Our ability to raise capital for new research and development is threatened. So are good, high-tech jobs.

The unintended consequences of this law will be felt by the small businesses that compose this industry at a disproportionate rate. A large corporation may be able to take a 2.3 percent hit. A company like mine needs the cash flow and the ability to keep the prices of its products competitive. We create devices that have to be perfect because they are placed inside the human body. This takes years of research and development and a commitment to a long FDA regulatory process — all of this costs money.

Unlike the pharmaceutical industry, which relies on large, multinational businesses for new medications, the medical device industry centers around smaller businesses like ours to drive research and innovation. We need the backing of venture capitalists willing to take a risk and support the years of research and testing necessary before a product gets to the marketplace.

President Obama has said the reform measures will help medical device companies by providing 30 million new customers who will now have health insurance to pay for that new knee or hip. Great news — if it is true.

It was not the case in Massachusetts, which in 2006 implemented a universal health care law. The law firm McGuireWoods released a report that found eight out of nine medical device companies surveyed in Massachusetts found no financial benefit from the law.

Now add this 2.3 percent tax — a tax on sales, not profits. Companies developing the newest medical devices tend to lose money in their early years. Yet they would still have to pay this tax, which could affect their ability to stay afloat.

Precision Spine, based in Parsippany, employs 60 people in Mississippi, and we want to keep our manufacturing plant here in America. We want to grow and create good jobs and superior products that improve lives.

Lawmakers negotiating during the so-called fiscal cliff failed to repeal the tax. We must continue to press for change. American jobs, as well as our nation's position as a global leader in medical device innovation, are at stake.

Jim Pastena, CEO
Precision Spine

Correction appended: Jim Pastena's title was incorrect in an earlier version.

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