A new medical device tax is expected to come into effect next year. The recent enacted The Patient Protection and Affordable Care Act introduced the medical device excise tax to be charged on the sales of medical devices in the United States. This is an additional tax that medical device companies have not yet encountered. Therefore, it will cause new challenges that could affect them negatively. As such, medical device companies have to develop new innovative changes and strategies to endure this new medical device tax and ensure future success.
The medical device excise tax was introduced following the enactment of the Patient Protection and Affordable Care Act in 2010. Also called the Obama healthcare law, the Patient Protection and Affordable Care Act aims to introduce healthcare reforms that will help to put more Americans under medical insurance as well as reduce the country’s healthcare costs. This act imposes 2.3% of medical device tax on the sales revenue of medical devices, which is aimed at raising $20 billion over the next ten years to support the large medical bill (Congressional Budget Office, 2009). This tax does not apply to profits but makes emphasis on sales revenue. As such, all companies involved in the manufacture and importation of medical devices are expected to pay it, whether they make a profit or loss. Some of the medical devices expected to be taxed under this new act include dental instruments, defibrillators, surgical gloves, Advanced Imaging Technology machines, wheelchairs, irradiation equipment, artificial hips, cardiac pacemakers, and coronary stents. Medical devices that are exempted from this tax are all Class I devices, hearing aids, contact lenses, eyeglasses, and any other types of devices that are usually bought by the public from retail stores for individual use (Gruber, 2011). Total sales received in the medical device industry are annually estimated between $106 billion and $116 billion in the United States (Flavelle, 2012).
This new tax is expected to come into effect on January 1, 2013, following a postponement by congress from its initial start date. Many medical device manufacturers have been opposed to this tax and have put up a lot of campaigns and advertisements in the media calling for its removal. Efforts to abolish the medical device tax by these manufacturers in 2009 were not successful, though they resulted in the tax being reduced by half to the current 2.3%. A study carried out in 2010 by MassDevice, medical devices industry publication, found out that 86% of the medical device tax would be collected from the top 10 medical device manufacturers (Staff of Massachusetts Medical Devices Journal, 2010). For instance, Johnson and Johnson is one of the leading medical device manufacturers. Its global sales for all of its products amounted to $65 billion, with its sales for medical devices and diagnostics in 2011 amounted to $26 billion. Medtronic, the biggest medical device manufacturer, had its sales totaling to $16 billion and profits amounting to $3 billion in the 2011 fiscal year. In this respect, these companies are expected to pay large sums of money as a result of this new medical device tax since they have huge sums in sales. Though it constitutes a small percent of the total amount of revenue that the government seeks to raise through the Patient Protection and Affordable Care Act, it seeks to help pay for the country’s healthcare. Amounting to about 4%, it will affect the sales revenues of medical device manufacturers resulting in reduced profits.
Most of these medical device manufacturers are small companies that usually do not make profits continuously as they have to use large amounts of their revenues to develop new medical devices for their markets. In addition, most start-ups barely make profits during their early years and, therefore, such a tax negatively affects their growth and expansion (McDonough, 2011). For instance, Abiomed, Massachusetts-based medical device company reported sales revenues of $1.26 and a $1.5 million profit in the 2012 fiscal year. If the medical device tax was in effect, the company would have been forced to pay all of its profits as well as an additional $1.4 million. Abiomed CEO said that the amount that the company would have to pay as a result of the tax is equivalent to 15% of research and development expenditure, 10% of its employee wage bill, or double the amount it spends to cater for healthcare of its employees.
This tax is also viewed negatively by many economic and industry leaders as it can result in the loss of many jobs, worsening the unemployment situation in the country despite the efforts to reduce the unemployment rate. The medical device industry employs about 400,000 people directly, with about 1.5 million people being employed indirectly. For that reason, this tax has received a lot of opposition from most medical device manufacturers and economic leaders due to the contractionary effect it has on the economy. A study that was commissioned by AdvaMed found out that the medical devices industry would lose 43000 jobs because of the new medical device tax (Furchtgott-Roth & Furchtgott-Roth, 2011). Opposition to this tax has also resulted in the Republican-led house introducing the Protect Medical Innovation Act of 2011 and the Medical Device Access and Innovation Protection Act, which aim at removing the medical device excise tax and raising that money by removing the income cap on insurance tax credits.
This tax is also expected to result in reduced innovative abilities of most medical device manufacturers. The United States is a global leader in medical device technology with American companies developing some of the most innovative medical devices used around the world. The new medical device tax is expected to cause serious negative impact on medical device innovation in the country as most companies are forced to move their operation into other countries. Most companies have begun to build their research and development departments in other countries where they will have better tax incentives as compared to the United States. For instance, Boston Scientific has developed a new research and development plant in Ireland worth $35 million. This negatively affects the American economy as hundreds of jobs are taken offshore whereas they are needed back home given the rising unemployment rate in the country. This is not good for the country regarding the amount of jobs that the medical device industry has helped to create in the economy over the last 20 years.
This is not good for the country since it will reduce the amount of access to new break-through medical technology. Other countries such as Brazil, China, and India stand to benefit as they will have the ability to create better and improved medical devices developed using next generation technology. In addition, venture capital firms will resist from financing start-ups in the medical device industry as they will be unable to make profits. This will affect these companies, which really need such financing to be able to carry out their operations, especially for their research and development endeavors that usually use up a big percentage of the finances. Without making changes to this tax, the country may experience a mass departure of jobs and capital as people and venture capitalists seek to invest in other profitable ventures outside the country.
The reduction in sales revenue and subsequent profits has prompted medical device manufacturers to take several strategies that will enable them continue operating profitably. One of the strategies has been employee layoffs. These companies have been forced to lay-off several of their employees in order to reduce their wage bills and remain profitable. Employee salaries and wages amount to a major expenditure for most medical device manufacturers due to the large number of skilled employees. Companies provide work for professionals to develop novel medical devices. Some of the leading medical device manufacturers have already started to lay-off some of their employees ahead of the commencement of the tax next year. Welch Allyn also announced that on September 10, 2012 it would dismiss 275 workers. Stryker Corporation has also announced that it will dispense 1,000 employees as a result of the medical device tax.
In addition to layoffs, some manufacturers are opting to open up operations in other countries where production costs are lower and will enjoy better tax exemptions. By investing in other countries, these companies are able to operate profitably as they end up not paying such taxes as the medical device tax, hence are able to make profits. Cook Medical is another company that has cancelled its plans to build new device manufacturing plants as a result of the medical device tax. The company estimates that the new tax will cost it about $30 million annually, which is a huge sum of money. The company recently used a similar amount to refurbish an abandoned factory last year, which is expected to employ about 300 people. The company had planned to refurbish another five abandoned factories but the new medical device tax is expected to consume a large amount of the money the company expected to use for the refurbishments. The company’s executive director stated that this tax affected the company’s expansion strategy as it had hoped to have new plants and assist in creating jobs in the Midwest.
Medtronic Inc is the biggest and leading medical technology company in the world and is listed among the Fortune 500 companies. Founded in 1949, the company began as a repair shop for medical equipment. It expanded through making custom pacemakers and selling medical equipment from other companies, enabling it to grow over the years and become a leading company of medical technology. Its major business units are Cardiac Rhythm Disease, Surgical Technologies,Spinal & Biologics, Diabetes, CardioVascular, and Neuromodulation. These units develop medical devices and therapies that help in treating and managing over thirty chronic diseases, such as chronic pain, heart failure, urinary incontinence, Parkinson’s disease, diabetes, obesity, and spinal disorders.
As the leading medical technology company, Medtronic is one of the companies that are to be affected by this new medical device tax. This has prompted the company to take several measures that will enable it to continue making profits and safeguard shareholder interests. The company expects the new medical device tax to cost it from $125 million up to $175 million per year beginning next year. The company’s chief executive officer said the enterprise had already modeled the new tax into its future business plans and would be able to attain profitability. The company is looking for ways to pass on the new costs it expects to shoulder as a result of the new tax to its customers. The company earned $16 billion in sales in 2011 and paid a total $1.62 billion as income tax. This is a large amount the company is expected to pay as it is an addition to the already existing federal tax that stands at 35% as well as other local and state taxes the company is expected to pay. As such, the new medical device tax is expected to increase the total tax the company pays by $175 million. Medtronic also announced that it planned to lay-off 1,000 workers. I think this strategy is better than those that have been adopted by other enterprises. Consequently, Medtronic will be able to make profits by passing on the extra costs it gets from the tax over to its consumers. This will help it to maintain its consumers and market share.
Conclusion
A new medical device tax is expected to come into effect beginning from 2013. This tax was introduced following the enactment of the Patient Protection and Affordable Care Act in 2010. It proposes 2.3% of tax on the sales revenue of medical devices, which is aimed at raising $20 billion over the next ten years to support the large medical bill. The tax has made many medical device companies dismiss some of their employees. These companies have been forced to lay-off several of their workers in order to reduce their wage bills and remain profitable. The tax is also expected to result in reduced innovative abilities by most medical device manufacturers. Some manufacturers are opting to open up operations in other countries where production costs are lower and, therefore, will enjoy better tax exemptions. As a consequence, this tax has received a lot of opposition from most medical device manufacturers and economic leaders due to the contractionary effect it has on the economy. Obviously, this tax will be affecting medical device companies since they are making future plans to deal with this change. It will be survival of the fittest. Whatever company is able to make the most innovative change to incorporate the tax it will stay ahead of the game and continue to be successful.
