Medical device tax: An ugly duckling

Edition: September 2012 - Vol 20 Number 09
Article#: 4066
Author: Repertoire

One of the hottest potatoes associated with the Affordable Care Act is the provision calling for a 2.3 percent excise tax on medical devices sold, beginning in January 2013. The big question among supply chain members is, Who’s going to get stuck holding the bag? Will manufacturers have to eat it? Will they try to pass the cost on to their buyers? And who will those buyers be – distributors or end users?

The tax is projected to generate approximately $20 billion over 10 years, and is intended to be the medical manufacturing community’s “contribution” to healthcare reform. Exempted are eyeglasses, contact lenses, hearing aids and “any other medical device determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use.”

At press time, Senator Orrin Hatch (R-Utah) was continuing to collect co-sponsors to his Medical Device Access and Innovation Act (S.17). The bill, which was introduced in January 2011, would “repeal the job-killing tax on medical devices to ensure continued access to life-saving medical devices for patients and maintain the standing of the United States as the world leader in medical device innovation.”

‘Damaging effects’

Immediately following the Supreme Court decision, AdvaMed President and CEO Stephen Ubl released this statement: “AdvaMed supported goals of health care reform consistent with our long-held principles. We have consistently opposed the $29 billion medical device tax because of its damaging effects on economic competitiveness, jobs and the research and development needed to find tomorrow’s treatments and cures. The House has already voted to repeal the device tax, and we are heartened by the number of senators who have said they oppose the tax. We will continue to work with policymakers on both sides of the aisle to achieve this goal.”

Speaking with Repertoire, AdvaMed Vice President, Policy Communications Wanda Moebius said, “We will continue to educate as many people all across the country, and now with the focus on the Senate, about the harm to medical innovation and job creation that the tax brings. The more people hear about this, the more they will understand the urgent need to repeal it.”

Elephant in the room

Sounding a somewhat different note is Sekisui Diagnostics Senior Director of Sales Jonathan Overbey. “Unfortunately, in order to pay for this Act, all stakeholders in healthcare will have to realize we have to pay our part….But at some point, downstream, you have to address the elephant in the room – cost.

“As an industry, everyone will have to look at their margins and decide whether they can absorb [the tax],” continues Overbey. “You’ll get a different answer depending on the manufacturer, their market share and product line.”

‘One more challenge’

“[The medical device tax] is just one more cost challenge we are having to deal with in an already challenging marketplace,” says Greg Blackmore, chief operating officer, Midmark.

“Authors of the Affordable Care Act explain that medical device companies will enjoy extraordinary sales growth as 30 million uninsured Americans are provided healthcare coverage, [and that] the tax is a fair way to have device manufacturers contribute to the cost of the program,” he says. “It is true that with 30 million more patients, we should see an increase in sales for things like pharmaceuticals, surgical supplies, etc. However, with an existing shortage of doctors and nurses, Midmark does not expect an extraordinary increase in sales for most of the equipment it provides. Instead, providers will be forced to become more efficient and make do with the equipment they have.”

Midmark expects the tax will impact roughly 75 percent of corporate-wide sales, that is, sales inside the United States, says Blackmore. “While some companies have publicly announced employee layoffs resulting from the pending tax, Midmark is not planning any staffing reductions as a result of the tax. We will find alternative ways to deal with this challenge.”


Says Welch Allyn President and CEO Steve Meyer, “We are disappointed that such a regressive excise has been put in place on the device manufacturers. Since it is a tax on revenues, the bottom line impact is more significant on a percentage basis. Many early stage companies with exciting technology just emerging, and those with narrow margins, will find themselves in an especially challenging situation regarding profitability. In addition, the administrative costs to manage it are substantial as well.

“It’s hard to imagine how this will help one of America’s premier industry segments compete more effectively on a global basis,” says Meyer. “In my 30 years in this business, I’ve not seen such a severe impact on our business as the device excise tax.”

Providers’ strategy

Even providers were apprehensive of the impact of the 2.3 percent tax.

Premier healthcare alliance is concerned about the potential for the device tax to be passed on to its members in the form of higher prices, says Blair Childs, senior vice president of public affairs. “Our approach to mitigating the potential for this to occur has been by pushing for a three-year window to implement the tax so as to allow Premier to run our three-year contracting cycles and use competitive market forces to draw the cost of the tax out of the products, rather than it being passed on to hospitals.

“We always run the risk that a tax will be passed on to the purchaser, and we are exploring what additional steps we can take in our GPO contracting process to address this potential risk for the benefit of our members,” he says. “We have done everything in our power through the legislative process to prevent the tax from being passed along to our members, and we will continue to fight to prevent that from occurring.”

In a comment letter to the Internal Revenue, Childs raised another red flag. “One of our goals in commenting on the tax proposal [was] to ensure that the surgery kits that hospitals assemble by packaging and sterilizing medical devices and other supplies together are not taxed, but rather that only the devices in the kits are taxed.”


EMR adoption will continue, confusion notwithstanding

It was the American Recovery and Reinvestment Act of 2009 – not the Affordable Care Act of 2010 – that offered incentives for implementing electronic medical records. “The two laws were never technically linked, so a reversal of [the Affordable Care Act] would have had no official effect on the Recovery Act,” points out Michael Paquin, president, MDP Group, Thousand Oaks, Calif., and industry expert on electronic medical records. But enough confusion exists among the general public that a Supreme Court reversal might have affected the rate of EMR implementation, he says.

“I believe that providers would have slowed adoption further, because some would have assumed that the EMR stimulus dollars were now going to stop as well.”

As it stands, the EMR adoption curve will continue to move in a positive direction, says Paquin. “I also think that some of the weaker products will be seen as inferior with the specter of more complicated healthcare delivery models on the horizon.”