Is 2.3% Sales Tax Really Too Much Headwind for US Medtech? Observations from Across the Pond

I’ve admired the U.S. medical device industry for 26 years now, from the perspective of being part of it and being an observer of it. I’ve attended congresses and marvelled at the sheer scale of the thing. I mean look at it... AAOS next month will again be a gigantic showcase of everything orthopaedic and goodness knows how many thousands of orthopods and industry staff will be there... 26,000, 27,000?

And then there’s the innovation. Whether from universities, the minds of medical professionals, or company R&D staff, ideas turn to reality with breathtaking frequency compared with the rest of the world. Why so? Well, again it’s scale: The market size and willingness to embrace the latest and greatest (market forces and all that), making ideas that wouldn’t stand a chance in for example UK, appealing to an investor community seeking the next big thing.

The result: expensive sales teams getting paid more than their overseas counterparts for selling more devices than their overseas counterparts in what looks to some like a land of milk and honey. It’s all about one word: “incentive.” And until recently, incentive has been big enough for companies to do all this stuff and even make it worthwhile to embark on the painful FDA approval process because of the promise approval brings.

But now, things seem to be changing. I witnessed Bill Clinton’s speech at Advamed 2009, during which he referred to the U.S. healthcare system as being an “unsustainable drag on the US economy.”

Leap forward two years and we have the embodiment of what he was warning us about... 2074 pages of PPACA, summarised for medtech as a number—2.3%—the sales tax on medical devices.

And industry is on a mission to have the act repealed, because it appears to be the cause of all its ills. Tell me if I’m wrong, but medtech’s position looks something like this: Why penalise a successful industry to this extent? The result will be 43,000 lost jobs, less innovation, and higher priced goods.

The only problem is, chaps, that the legislature is either not listening or it doesn’t believe you. Lobby all you like, but the belief that you’ll get through it with typical American guts and ingenuity will prevail. And that might be right... this could be good old fashioned Darwinism at work, industry’s gripe being that the comet that hit the earth was self-inflicted this time around.

From over the pond, messages appear to be getting mixed up. One minute it’s: “U.S. companies are going overseas because of the 2.3% levy” (not that company location is going to make a difference to the levy... if you sell in the U.S. you’re “in”, whether your stuff is made in Birmingham Alabama or Birmingham UK).

The first reason for locating overseas seems to be that many big companies are openly stating that U.S. sales growth is slower than elsewhere and downward price pressure is exacerbating the effect. Why, if an overseas government offers you an inducement to build a shiny new factory right where your new market growth is projected to come from, wouldn’t you take it?

Reason number 2: FDA. Another barrier to US domestic progress and explanation for sales coming increasingly from non-U.S. markets is the burdensome, expensive, and slow FDA process, meaning you can start to generate revenue from your new widget more quickly overseas than you can in USA.  

So, there we have it. Two reasons to expatriate at least some of your company and neither of them are directly related to a year-away provision of a tax.

What does seem to make sense to me at least, is the argument that the levy will adversely affect already weak investor sentiment. If the tax really equates to a 15% tax on profit, then the time to gain a return on investment is no doubt extended. If I was lobbying, this would be my starting point, especially when I listen to the State of the Union Address and hear so much about encouraging innovation (and no mention of this act at all).  

My business, in fact my passion, lies in trying to help medical technology to find its way into non-U.S. markets. It’s my conviction that U.S. medtech is, as a rule, generally under-communicative with its medical professional target audience outside USA, to the extent that it’s no real wonder that  the UK NHS is known as the western world’s slowest adopter of new technology. That just sounds like an underexploited opportunity to me that might need to jump up the priority list if you’re really to deal with this domestic headwind. Come and have some of ours. But believe me when I say you still would not prefer the situation over here. DRG systems in some of our biggest markets like Germany do not favour healthcare economic arguments, reps being met every day by; “a new product must replace something else, be better und cheaper!” In UK it’s usually a matter of “no new products” embargoes, which may sound utterly crazy, but is the budget holder’s first response when faced with your shiny new widget.  

Back to U.S. medtech’s plight then. Are there better, more targeted ways of saving $20 million over ten years? I notice measures like the additional levy on elective cosmetic surgery procedures, and think that seems like a smart move. But it has already been rescinded in New Jersey. And someone’s going to have to get creative about a hit list much bigger than that.
Alternatively, now that there is an incentive to pay executives and reps less or trim your distributors’ margins, why not do it? Surely that’s a better idea than mass redundancies, yet I’ve not seen it mooted anywhere. 

Even after everything we’ve considered here about why U.S. may be a better place to be than UK on many counts, even in today’s straitened times and with the tough prevailing investment landscape and even in the face of a 2.3% sales tax levy. Where would I, given the choice, pitch my medtech newco tent? It might not be as rosy as it once was, but it’s not exactly Hades.

—Nick Woods