April 22, 2013

One More Bad Idea: The Medical Device Tax

By  Michael D. Shaw

It may well be a fool’s errand to determine the worst provision of the mammoth Patient Protection and Affordable Care Act (ACA or Obamacare), but this one surely belongs near the top of any list: Section 1405, the Excise Tax On Medical Device Manufacturers. I will describe this outrage in the elegant detail in which it is recorded, to give you some idea of the mindset at work here.

To be precise, this Section appears under The Health Care and Education Reconciliation Act of 2010, an amendment to ACA. Drilling down a bit, we find Title I—Coverage, Medicare, Medicaid, And Revenues. Then, there is Subtitle E—Provisions Relating to Revenue, and then finally our little Section. Sec. 1405 amends Chapter 32 of the Internal Revenue Code of 1986 to insert a Subchapter E—Medical Devices, with its own Sec. 4191…

There is hereby imposed on the sale of any taxable medical device by the manufacturer, producer, or importer a tax equal to 2.3 percent of the price for which so sold. The term “taxable medical device” means any device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans. In simple terms, that means anything other than such products “generally purchased by the general public at retail for individual use.”

Note that the tax (starting in 2013) is on gross sales, and not profits. In most cases, this will become a levy on the total revenues of a company, regardless of whether or not the company earns a profit. No doubt, there will be businesses owing more in taxes than the net profits generated from their operations. Imagine what this will do to innovation, patient care, and job creation. Yes, please imagine this, as the authors of ACA obviously did not.

The proponents of this excise tax argue that ACA will bring in many more patients, and in fact will benefit these same manufacturers who are now complaining. There is also the implication that the device companies are making so much money, it would not matter anyway. Conveniently overlooked in this argument is the plain fact that many innovations come from smaller start-up companies, and these are the ones that would be most affected.

Moreover, a goodly number of positive analyses of the excise tax smack of the same “echo chamber” mentality that also predicted how ACA would lower everyone’s health insurance premiums by an average of $2500.

Indeed, trade groups have said from the beginning that there is no hard data even vaguely showing that the tax would be offset due to an increased pool of insured beneficiaries receiving treatment. On the contrary. Since the majority of products impacted are used in acute care settings, where there are legal obligations to treat a patient, the effect of expanded coverage is not likely to increase utilization. In January, speaking in the wake of the first semimonthly payment of the tax—amounting to around $97 million—trade leaders expressed industry sentiments.

“Instead of investing in new medical technologies or creating new jobs, innovators across the United States wrote a check to the IRS this month. MDMA and our members remain committed to repealing the medical device tax, but it shouldn’t take more job losses and forgone therapeutic advancements to highlight just how damaging this policy is to a unique American success story.”—— Mark Leahey, President and CEO of the Medical Device Manufacturers Association.

“Every dollar spent on this tax is a dollar taken away from medical innovation and job creation. This tax is already resulting in layoffs, reduced investments in R&D and delays in significant capital improvements. We urge Congress to act swiftly and repeal this job-killing, innovation destroying, anti-competitive tax.”——Stephen J. Ubl, President and CEO of the Advanced Medical Technology Association.

Change may be in the wind. A symbolic vote a few weeks ago via the Hatch-Klobuchar amendment, which passed the Senate by a vote of 79 to 20, supported repeal. Those in favor included some liberals who have probably never voted to repeal a tax in their entire careers. We will see how this plays out.

In the meantime, along with all the other challenges, medical device companies must maintain good communications with their shareholders—as in Investor Relations (IR). Patricia Baronowski-Schneider, President of Pristine Advisers explains…

Creating awareness and having a competitive edge are critical, particularly in the midst of significant changes by insurers, the federal government, and other institutions. Enhanced communications with the investment community provide a significant advantage to companies in the health care arena. Good IR builds trust, forges partnerships, and garners respect in the investment community. With over 23 years of IR/PR/Media experience in the financial industry, Pristine Advisers has a proven track record of helping clients increase value.

Well said. In this era of ACA, companies—and consumers—need all the help they can get.