The people at Zoll Medical Corp. saw a ray of hope in January when Scott Brown was elected senator from Massachusetts. Located in Chelmsford, 30 miles outside of Boston, Zoll is the nation's leading manufacturer of heart defibrillators, which save the lives of thousands of heart-attack victims each year. Back in January, as the Senate race was raging, both House and Senate Democrats wanted to impose a crippling new tax on the makers of medical devices, Zoll included, to help pay for Obamacare.
The total tax on the industry would be about $2 billion a year, or $20 billion over the next decade. Companies watched nervously as lawmakers pushed ahead, first the House and then the Senate. But then Brown was elected on the promise to be the crucial Republican vote to stop healthcare reform. For Zoll, things were looking up.
Not anymore. Democrats regrouped, pushed the legislation through Congress, and now the new tax is law. And that means Zoll and other medical-device makers could be headed for hard times.
"We believe that the tax will cost us somewhere between $5 million and $10 million a year," says Richard Packer, Zoll's chairman and CEO. "Our profit in 2009 was $9.5 million."
That would be a devastating blow. Zoll employs about 1,800 people. Roughly 1,600 of them are in the United States, and about 650 of those are in Massachusetts. Once the new tax kicks in, that could all change. "We can't run this company at a break-even or a negative rate," says Packer, "so we will be forced to look at alternatives."
The company's first option is to pass the increase onto customers such as hospitals and ambulance companies. That might or might not work, given that they are coming under increasing pressure to cut their own costs.
The next option is to cut research and development -- a short-term, money-saving move that will surely cost Zoll down the road. And a third option, says Packer, is to "look at trying to shift jobs to lower-cost places around the world." That would be bad news for Massachusetts and the United States.
It's still not clear precisely how the new system will work. The new healthcare bill, along with the "fixes" passed along with it, would impose a 2.3 percent excise tax on medical devices, going into effect in 2013. For Zoll, that's a little better than an earlier version of the tax, which would have gone into effect immediately. Now, at least, they have some time to prepare.
But no matter how it plays out, the makers of the devices that save our lives are going to take a major hit.
"It's a real concern for some of these companies, in that they probably are operating on pretty thin margins," says Brian Johnson, publisher of MassDevice, an independent business journal devoted to the medical-device industry. Johnson adds that even those companies that can pay the tax face perhaps even more serious problems because of recent government actions, apart from healthcare reform, making it harder and more costly to win Food and Drug Administration approval for new products. "As a whole, in terms of stricter regulation and the added tax, that's a pretty big bag they're carrying right now," Johnson says.
And then, of course, there is the continuing economic downturn. All in all, it's not a good time to levy a new and burdensome tax on a highly innovative American industry. And yet that is exactly what Obamacare does.
When I called Richard Packer at Zoll on the morning after the bill was passed, I asked how he was doing. "A total state of depression," he answered, with the kind of short, dry laugh that says it's not really funny. A lot of Americans are feeling that way now.
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