Device Tax Will Lead to Job and R&D Cuts, Survey Claims

Job cuts and slashing of research and development budgets are two of the likely options that medical device companies in the Commonwealth of Massachusetts likely will take to address the impending excise tax on their products, according to a new survey of senior executives of the firms. The Massachusetts Medical Device Industry Council (MassMEDIC) conducted a survey last month among medical technology manufacturing companies in the region to gauge their plans and readiness for the coming tax and its impact on company operations.

The tax, which goes into effect Jan. 1, 2013 and raises $20 billion over a 10-year period, was established to help finance the Affordable Care Act that was signed into law in March of 2010. The amount is based on a 2.3 percent excise tax that will be levied on the sale of most medical devices, regardless of whether a company generates a profit.

“We warned two years ago that medical device companies would be forced to deal with this tax by preparing for job cuts and reductions in R&D spending,” said Tom Sommer, president of MassMEDIC. “The U.S. leads the world in developing and manufacturing medical products, it doesn’t make sense that on one hand the government is promoting exports and manufacturing jobs, while on the other hand it is implementing policies that will cut jobs in this sector and harm its competitive advantage—the development of innovative medical technologies.”

MassMEDIC surveyed 42 senior executives of medical device manufacturers. Key findings of the survey include:

• As of February 2012, 10 months before the tax goes into effect, only 25 percent of responding companies have put systems into place to comply with the tax;
• Forty-four percent of respondents said their companies would pass the cost of the new tax on to end-users, such as hospitals, clinics, purchasing organizations and doctors. This would result in higher costs for medical devices sold in the United States; and
• Thirty-nine percent of respondents said their companies would assume the cost of the tax, implementing internal cost reductions to meet revenue losses, taking the following actions:
− 50 percent will cut R&D operations;
− 25 percent will implement workforce reductions; and
− 25 percent will move manufacturing to lower cost areas.

MassMEDIC also found that 49 percent of respondents said that the tax would have a “significant impact” on their company’s operations, while 75 percent said it would “have an impact.”

Proponents of the healthcare reform law argued that medical device companies would experience a jump in revenue as a result of millions of newly insured citizens. Industry representatives at the time said that the overwhelming number of devices used by patients is already covered by private insurance plans or through Medicare.

Massachusetts’ universal healthcare law has been in effect for six years. With nearly 100 percent of the population now covered by health insurance plans, the survey participants were asked if their companies had experienced an increase in unit sales in Massachusetts since 2006. None of the respondents reported an increase in unit sales in that time period.

The U.S. Department of Treasury will be responsible for collecting and administering the tax. The department issued proposed regulations on the collection of the tax earlier this year. No timetable has been set for the release of final regulations.