The intent of this blog is to discuss the Medical Device Excise Tax’s effect on the industry, and ask the questions which I can’t answer. This is obviously an issue all of us in the industry are aware of, and I hope that I at least provide some information that may be new to you, or that you haven’t necessarily considered within the context of the arguments about the tax.
The medical device tax places a 2.3% excise tax on the sales, not profits, of medical device companies. This tax will lead to an additional ~$30 Billion in cost to the med device industry over the next 10 years, but that really isn’t the problem. That ~$30B is earmarked for funding the Affordable Care Act, which will lead to more insured people, generating a larger patient base.
Theoretically, even though the tax will have a major negative initial impact on Medical Device companies, it will end up generating more business, due to the increased patient population having access to healthcare, and having procedures which require the use of medical devices. However, that is not likely to happen. 80% of the people who will benefit from the Affordable Care Act are under the age of 45. The vast majority of people who need procedures involving medical devices are over the age of 60, and are already covered through existing government backed or funded programs. There will definitely be some level of uptick in surgery volumes, will not come close to generating profits of $30 Billion to offset the costs of the new tax.
Follow the Money
The medical device industry is incredibly top heavy, meaning the top 5-7 leaders in each vertical own the vast majority of the market. The case can be made that they will bear the largest percentage of the cost, which can be misleading. Many large medical device companies have already eliminated jobs to reduce cost in preparation for the tax. They are Multinational companies that can afford to cut jobs and still operate effectively.
The companies that are truly going to suffer are the start-ups. 80% of Medical device companies have equal to or less the 50 employees. Due to high costs needed to bring a new medical device to market, most of these companies are operating at a loss. But keep in mind, the tax is on sales, not profit. The real cost of the tax is difficult to calculate, because when everything drops to the bottom line, the margins are very thin or nonexistent. These startup companies have to eliminate jobs, and operate in an even more constrained environment then they ever have. Many have folded, and even more aren’t event launching. The number of new start-ups in the industry is at the lowest level that it has been for many years.
So who suffers?
There are two groups that suffer. People Employed by the medical device industry, as there will be less companies in the overall industry pool. Job cuts have already occurred, but there is a longer term issue. There are approximately 2 million people currently working in the medical device industry. Fewer companies will result in fewer jobs, creating greater competition for positions, which results in lower compensation. Remember, there aren’t going to be more surgeries, so the number of jobs isn’t going to increase. The entrepreneurial spirit is being squelched resulting in an industry that will become even more top heavy.
The other group that suffers greatly is patients. Start-ups are the engine that drives innovation in all industries, but specifically in medical device. Less start-ups mean less innovation. Less innovation means less cutting edge options, and major advances in patient care. Keep in mind that the big companies don’t innovate. They protect their products. It is the small companies that bring new technology to the game.
This blog points out the negative effects of the Medical Device Tax, but it doesn’t really address the main questions. Those being, why are only the Medical Device companies shouldering the cost of the Affordable Care Act and why have these taxes not been applied to the other aspects of the healthcare industry, specifically the Pharmaceutical companies, who actually benefit the most from increasing the number of insured patients? At the end of the day, it isn’t the tax that’s the issue; it is the fact that the tax is only being levied on the industry that will see the least benefit from the Affordable Care Act.