Medical device tax goes into effect despite industry objections

A 2.3 percent medical device tax went into effect on Jan. 1 as part of the Affordable Care Act, despite claims from medical device companies that the tax will significantly hurt their businesses.

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.

President Barack Obama rejected the idea of delaying the implementation of the tax – which had been proposed by 18 Democratic senators and senators-elect in a letter sent to Senate Majority Leader Harry Reid (D-Nev.) on Dec. 4 – saying medical device companies would make up for the lost revenue because the ACA will bring more healthcare consumers into the marketplace.

In an interview on Dec. 14 with Frank Vascellaro of Minnesota-based CBS news affiliate WCCO, Obama said, “The healthcare bill is going to provide those healthcare companies 30 million new customers. It’s going to be great for business and they’re doing really well right now and they’re going to get 30 million more customers as a consequence, so this additional tax essentially comes back to them as new customers. ... The idea is that when you have 30 million more people coming in, you’re going to make money, you can do a little more to help facilitate and make sure people are getting the healthcare they need.”

The medical device industry has been vocal in its objection to the tax.

“We have seen no studies or evidence of any kind that device companies will benefit from new patients,” said Steve Ferguson, chairman of the board of medical device firm Cook Group, Inc., parent company of Cook Medical. “In fact, the mass experience says device companies will not benefit. In addition, there have been studies concluding (the medical device industry) will not benefit.”

Ferguson also believes the tax will give a competitive advantage to foreign device companies and will have a negative impact on U.S. companies’ hiring practices.

“Companies have already announced employee downsizing in order to pay the tax,” he said.

Kevin Lobo, president and CEO of Kalamazoo, Mich.-based medical device company Stryker, said the company is “significantly concerned” about the tax.

“Stryker expects to owe approximately $100 million in the first year alone, equating to over 20 percent of our annual, global R&D investments,” said Lobo, noting that the money would be better spent on job creation, innovation and clinical research.

Bruce Carlson, publisher at New York City-based healthcare market research firm Kalorama Information said that the tax is especially difficult for medical device companies because it is on revenues rather than profits.

“No company in any industry would like to hear that as of tomorrow their sales will be cut 2.3 percent, which is one way to look at what’s happening,” said Carlson. “Companies and investors expect growth each year. (This) tax reduces income, detracts from earnings and might be a negative factor for investors in the stock market otherwise looking at device companies.”

The device industry will also be hit hard by the tax because it is difficult for companies to pass a price hike onto the consumer, noted Carlson.

“Device companies in this industry are in a bit of a difficult spot in terms of passing on costs,” said Carlson. “A tax on, say, soda or gas is passed to the consumer. In this industry, it will take months or years to do that and it’s a negotiation. A lot of pricing is contracted or negotiated through group purchasing organizations.” 

Contrary to Obama’s prediction, device companies are not likely to receive enough business from new healthcare consumers to offset their losses, said Carlson.

“A more accurate way to describe the tax is that it helps to subsidize some of the costs that the government is bearing in the form of Medicaid, which helps to fund the status quo market. But a windfall from new patients is unlikely,” he said.   
 

[See also: Obama rejects idea of delaying medical device tax]

[See also: Medical device excise tax remains in place after SCOTUS ruling]