The Healthcare Distribution Management Association (HDMA) submits this testimony to express serious concerns with the gross receipts tax proposal currently under consideration. Healthcare distribution is a “high-volume -- high cost -- low-profit margin” business that suffers disproportionately from a gross receipts tax. Given the business realities of operating in this competitive market, it is impossible for healthcare distributors to absorb the financial impact of a gross receipts tax.
The Healthcare Distribution Management Association’s (HDMA’s) primary, full-service healthcare distributor members include approximately 40 national, regional and small, family-owned businesses. The HDMA members that serve Illinois deliver medicines to more than 6,900 in-state hospitals; health systems; nursing homes; independent, chain and mail order pharmacies; clinics; government sites; and doctor’s offices each day.
HDMA members manage some of the most sophisticated and efficient facilities in the world -- 10 of which are located in Illinois. These distribution centers are critical hubs that allow for the efficient delivery of pharmaceuticals, vaccines, chemotherapy drugs, over-the-counter medicines, home healthcare products and medical/surgical supplies from more than 700 manufacturers. HDMA member distributors directly employ an estimated 4,600 Illinois residents, and contract for transportation and other services that support hundreds of additional jobs.
Gross Receipts Taxes Will Have a Disproportionate Impact on Healthcare Distributors
Gross receipts taxes generally are based on total sales revenue, without consideration of profitability, operating costs or expenses (e.g., the cost of medicines). Given the high dollar value of the medicines distributors carry, even if the gross receipts tax rate is relatively low, the total tax owed becomes substantial when it is multiplied by the high volume of prescription medicines and healthcare products sold by distributors each year.
The typical profit margin in healthcare distribution is roughly 1%. Therefore, the .85 % proposed tax will have a significant financial impact on distributors. In light of the renewed interest in gross receipts taxes as a state revenue source, HDMA commissioned a study by Price Waterhouse Coopers, LLC to examine this type of tax and the punitive effects it will have on healthcare distributors. I have included a copy of this study with my testimony, and I hope you will review this information as you continue to consider tax options for Illinois. According to this study, distributors will be assessed a disproportionately high tax that is almost ten times that of other industries. (See Attachment).
Not only is this an unfair burden for distributors, it is doubly harmful to distributors with margins too small to absorb the cost.
Gross Receipts Taxes Will Unintentionally Raise Healthcare Costs
The application of a gross receipts tax on healthcare distributors will create cumulative taxes throughout the supply chain that will unintentionally increase the cost of vital medicines for patients and payors.
HDMA recognizes that the current gross receipts tax proposal would exempt the retail sale of prescription medicines from the tax. Regardless, the tax still will apply at two other critical points in the supply chain; once when the medicine is sold by the manufacturer to the distributor, and again when the distributor sells to the retail or mail order pharmacy. Taxing products twice or more before they reach consumers will increase the cost of life-saving medicines, and is counterintuitive to the Administration’s efforts to contain healthcare costs.
Gross Receipts Taxes Penalize In-State Companies
Moreover, because the tax cumulates at each stage of the supply chain, a gross receipts tax will create competitive disadvantages for Illinois companies. For example, a manufacturer selling prescription medicines to an Illinois distributor will be subject to the tax, as will a distributor selling to an in-state pharmacy customer. However, an out-of-state manufacturer, when dealing with a national distributor, may choose direct sales to a non-Illinois facility in order to avoid the tax.
State gross receipts taxes will have the unintended consequence of creating a tax incentive for manufacturers and distributors to use out-of-state facilities as much as possible in order to avoid extra layers of the tax. This could compromise the speed with which vital medicines are delivered to in-state customers. Ultimately, we fear the tax will also penalize Illinois pharmacies, providers and consumers, who may receive more limited service in the state, or who may absorb future cost increases. Delivering prescription medicines efficiently, safely and affordably to the Illinois consumer is of utmost importance, yet gross receipts taxes run counter to that goal.
Conclusion
In summary, gross receipts taxes will place a significantly disproportionate and punitive burden on healthcare distributors as compared to other industries, due to extremely low profit margins and an inability to absorb this type of tax. Additionally, the application of a gross receipts tax on this unique segment of the pharmaceutical industry will create cumulative taxes throughout the supply chain that will unintentionally increase the cost of vital medicines for patients and payors. Finally, gross receipts taxes discriminate against in-state businesses and place Illinois healthcare distributors at a competitive disadvantage. I urge you to reconsider this tax structure as a model for the state of Illinois, and in particular for distributors of prescription medicines and healthcare products. We are available to work with you to find alternatives to ensure that all taxpayers are treated fairly. |
