Medical device excise tax remains in place after SCOTUS ruling

As part of the ACA, the Supreme Court upheld a new tax provision intended to help fund healthcare reform – a 2.3 percent excise tax on medical device sales beginning Jan. 1, 2013.

The tax applies to medical device products intended for human use, but exempts eyeglasses, contact lenses and hearing aids, as well as devices that are purchased by the general public for retail or individual use.

[See also: Medical device companies feel economic pressure, see record M&A levels]

Bruce Carlson, publisher of healthcare market research firm Kalorama Information, believes the tax is concerning, but not devastating, to the $322 billion worldwide medical device industry.

“I don’t think it’s crippling to this growing and innovative industry by any means,” said Carlson. “It is just a drag on their operations and ability to go to capital markets and show operating income growth, but growth will occur.”

“I see the impact coming out of research and development,” he added. “I saw a comment to such effect by Stryker in The Wall Street Journal. Last year we noticed among our bellwether device companies the average was 8 percent increase in R&D. The year before it was 4 percent. I think the industry is always trying to develop new products to be able to introduce premium pricing on those down the line. If they need to cut costs that will be a place to do it.”

According to Kalorama, some companies have warned investors of the taxes they expect to pay in 2013 as a result of the tax:

• Johnson and Johnson, the largest device company, estimated that it will pay between $200-$250 million under the new law.
• Teleflex stated it would face $15 million in charges.
• Becton Dickinson said that 80 percent of its U.S. revenues would be subject to taxes.

“The tax will increase expenses next year and reduce operating income,” said Carlson. “Because it was phased in, device companies and their investors had time to plan for the costs. Because the law was challenged and appeared by many accounts to be in jeopardy, I imagine more than a few companies are rushing to assess the impact of this legislation on them now as if it were passed for the first time.”

“The positive news is that device revenues have been growing (plus 5 percent last year) as a result of emerging markets that will not be affected by this legislation,” added Carlson. “And far down the line, the anticipated increase in customers of healthcare should have some impact on the number of devices needed.  I just think that more than any of the other healthcare industries, the medical device companies will see the cost now and will only maybe see a benefit from the increased customer base, as the healthcare law also has provisions designed to reduce Medicare/Medicaid reimbursements, which should impact what hospitals can pay for devices.”