The Medical Device Excise Tax: 18 Months Later

When the Medical Device Excise Tax was announced it generated much-heated debate (http://1.usa.gov/1l0GFeJ). That heat seems to have dissipated over the past months as other issues have floated to the top of the news heap.

The End Is Near

Many didn’t seem to understand the furor over a relatively small 2.3% tax on medical devices. The tax, however, is taken right off the top-line sales rather than net profit, and this calculation has the potential of a large impact on the operations of medical device firms (http://bit.ly/1q4n13w).

A lot of speculation was offered as to why the tax would be either a good thing for healthcare or the death knell for the medical device industry. I, too, provided my opinion on what I felt were 5 likely outcomes regarding the future of the tax from repeal, through modification to inaction. But the fact is that no one knew outcomes for certain because the actual effect of the law hadn’t yet played out. Everyone was guessing which still seems to be the case.

After all the debate over the past year-and-a-half, hard evidence is apparently still in short supply, and polarization and entrenchment on positions have filled in the void. Lacking objective evidence regarding the actual impact of the tax, how can anyone be expected to make reasonable decisions about the tax? Yet it seems that practically no one, including our legislators, has demanded that objective evidence is produced for deliberation.

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Medical Device Excise Tax: What’s Next?

I note right up front that my comments below on the medical device excise tax are pure speculation on my part, a kind of thought experiment rather than a hard prediction of the future.

If you believe in “rational actors” on economic choices (a whole other discussion), then it would make no sense for the Government to tax firms into bankruptcy and thereby lose the tax on those lost sales.  So if the outcry from the medical device industry causes the Government to tweak the excise tax, then what might change?

I maintain that no one can know the future with certainty, including outcomes if the Medical Device Excise Tax goes into effect as currently planned. I’m tossing out five possibilities below, and intend to come back to posts on the excise tax in the future after the dust settles.

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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.

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