The Medical Device Excise Tax

President Barack Obama's signature on ACA

I recently had the opportunity to participate in a LinkedIn Group exchange on the topic of the upcoming medical device excise tax.  The exchanges included quite a bit of controversy for good cause.    The key points that emerged were:

  1. The Affordable Care Act (ACA) includes a 2.3% excise tax on many medical devices.
  2. Because this tax applies to sales and not profits, what appears to be a small inconvenience may actually create a significant impact on the profits needed by a firm to pay for R&D, staff, and operations.  In cases where profit margins are very slim, the tax could arguably eliminate any profit for the firm.
  3. Some firms have already started cutting expenses to address the impact of the tax, including market leaders such as Stryker who reportedly are laying off 1,000 employees in response to the tax.

Many pundits are predicting with great confidence either how well the tax will work with corresponding healthcare expansion under the ACA, or how destructive the tax will be to the medical device industry.  In one Group exchange, a participant declared that patient mortality will rise because the tax will limit life-saving innovations, although he acknowledged that objectively measuring such a cause-and-effect link would be very difficult.

The tax, of course, does not operate in a vacuum of inputs/outputs, and many levers are at work in the complex US Healthcare System, and the global medical device market.  Some businesses may not survive the excise tax assault on their profits, while others may pass the tax along to customers as has been done with other excise taxes.  Some businesses may cut all new product development and curtail marketing efforts, while other firms may cull out and focus on true innovations that make the firm a highly differentiated competitor and market leader.

I suspect that the ACA and medical device excise tax will continue to evolve under industry and political pressure over the months ahead, the Healthcare System will respond in unpredictable ways, and few of the assertive predictions made by pundits today will likely be close to reality by this time next year.  Time will tell.


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