As part of the recent healthcare reform  legislation, the medical technology industry will be taxed $20 billion over a 10-year period ending in 2019. Implementation of the 2.3% tax was delayed to January 1, 2013, giving device companies time to plan. The original 2010 start date would not have given device makers sufficient time to set aside funds to pay the tax. And, unless there is a change in administration, it is unlikely that the tax will be repealed.

Legislators had abandoned an earlier fee scheme that was based on market share in favor of a much more predictable excise tax based on sales. As an excise tax, it is deductible. But the industry still largely considers any tax “highly regrettable,” says Wanda Moebius, vice president, policy communications, for the Advanced Medical Technology Association (AdvaMed).

The tax covers most Class I, II, and III medical devices. Products that are sold at retail for use by an individual as well as hearing aids and contact lenses are explicitly exempt from the tax. The exclusions prevent the tax from being labeled as a consumer tax.

“The tax will present significant challenges for companies large and small,” says Moebius. “It could require a cut in research and development or jobs or some combination thereof, or it could be passed on to customers.”
Companies with high-margin products might be better prepared to handle the tax than those with products with small margins. “If you’ve got a company with a 1% margin, there’s no way it can absorb a 2.3% tax,” says Moebius.

She adds that AdvaMed will continue to pursue any regulatory and legislative opportunities to mitigate the tax. “We fought for healthcare reform, and we agree that patients need more access to our technologies and devices, but we didn’t think a tax was the way to pay for it.”

According to market research firm IBISWorld (Santa Monica, CA), “consolidation will be spurred by the reform’s implementation of effectiveness research; that is, studies on which medical devices work best. Smaller manufacturers may not have the resources to rebut studies that question a product’s value.” As a result, the firm says that the industry could consolidate to 9200 operators during the next five years. 

“Profits will decline as a result of the new taxes, and sales growth will slow to 2.9% on average per year through 2015,” says Sophia Snyder, industry analyst with IBISWorld.

Moebius notes that many members of Congress from both parties “fought for this industry in an effort to get that tax eliminated or reduced and [fought to] make it tax deductible.” It would not surprise those who work in this industry that there are a lot of good paying jobs in a lot of states all across the country, she says. But she thinks members of Congress may have been surprised to see the breadth of constituents in this industry.

Champions of industry will continue to push for a repeal of the tax. It has touched a nerve that some say will force companies to lay off employees, make cuts in R&D, or raise ­prices—or some combination of all three.

Industry may benefit from some outcomes of the healthcare legislation, but most of these benefits are intangible, difficult to measure, and likely to be seen only over the long term. First and foremost, expanded insurance coverage is good for America and good for patients. The device industry should see some benefit from improvements to the reimbursement system, which are designed to reward value rather than volume of services. Much depends on the way future regulations are written. If laws are written in a way that encourages the adoption of new technologies, they could reduce healthcare costs in the long term.