Report Indicates Device Tax Could Increase Medical Device Outsourcing

The tax imposed on device manufacturers as part of last year’s controversial healthcare reform legislation may be one of many factors driving the outsourcing of medical devices, according to a new report by Kalorama Information titled “Contract Manufacturing in Medical Devices (Materials, Processing, Electronics, Finished Products).”
 
The healthcare market research publisher reports that the once conservative medical device industry is outsourcing at an increasing rate, and the new tax, which could put pressure on margins, will be one more factor in growing the $60 billion market for outsourcing medical devices and device parts.  In order to partially subsidize healthcare financing and reduce the deficit strain, the Patient Protection and Affordable Care Act instituted a 2.3 percent excise tax on “taxable medical device” sales beginning in January 2013. The tax applies to medical devices intended for human use, but exempts eyeglasses, contact lenses, and hearing aids, as well as devices that are “generally purchased by the general public for retail or individual use,” as determined by the Secretary of the Treasury. Two measures recently were introduced in the House and Senate to repeal the tax.
 
Industry lobbying groups such as the Medical Device Manufacturers Association and the Advanced Medical Technology Association (MDMA) along with other groups successfully fought to reduce the target size of the tax last year (from $40 billion over ten years to $20 billion), but even in its revised form Kalorama researchers predict there will be an impact.
 
“The tax itself won’t force a firm to outsource,” said Bruce Carlson, publisher of Kalorama Information. “But since the law taxes revenues notwithstanding the cost of manufacture—it could add further pressure to bring costs down in order to restore profits.”
 
Although the tax will not be a reality for device manufacturing until 2013, it is a consideration now for many in the industry, and will be for the next few years as they await any further action on healthcare reform. Because the excise tax does not include a blanket exemption for Class I devices, the large category of non-retail Class I products, a wide range of medical devices, including low-risk hospital and physician office supplies, will be subject to the new tax.
 
“2013 is not that far away in terms of planning for manufacturing and soliciting vendors,” Carlson said. “Device manufacturers will make outsourcing decisions in the coming year, and the future tax will be a factor on their minds.”
 
At least one contract manufacturer agrees. Guidewire maker Lake Region Medical indicated in a recent press release: “The pressure on major [medical device] companies from the new taxes introduced in healthcare reform presents a growing opportunity to further serve the industry.”
 
More information on the report can be found at: http://www.kaloramainformation.com/redirect.asp?progid=80943&productid=6059484.