A little-known provision of the Affordable Care Act has some Maine companies changing their revenue forecasts in anticipation of a tax on the sale of medical devices that some say could cost the industry nearly $30 billion over the next decade.
While a bill aimed at repealing the tax passed through the U.S. House of Representatives by a comfortable 270-146 margin in early June, the measure is not expected to make it through the Senate and the White House has vowed to veto the bill, according to Bloomburg Businessweek.
The 2.3% tax, which would only affect medical devices not sold directly to consumers, was devised as a funding mechanism for the Affordable Care Act, recently upheld by the Supreme Court in a narrow 5-4 vote. The tax would go into effect on Jan. 1, 2013, and data on specific devices taxed under the provision are expected from the Internal Revenue Service later this year.
“It’s hard to tell what effect it’s going to have at this point, but it’s looming” says Mark Waite, CEO of Lighthouse Imaging, a manufacturer of medical optics located in Portland.
As a provider of medical device components to larger original equipment manufacturers, or OEMs, like Stryker, Waite says Lighthouse will not be directly affected by the tax, but its reverberations will likely be felt throughout the country’s $116 billion medical-device industry
“It will definitely make a difference in their bottom as well as ours, because we work with those sorts of companies,” says Waite.
OEMs like Stryker have already started to brace for the impact of the device tax. In November of last year, the Michigan-based firm with annual revenues of over $7 billion announced plans to cut 5% of its work force in an effort to reduce operating costs by $100 million, citing the tax as the driving reason for the cuts.
“This [tax] will end up making the cost of goods higher and since most of these medical devices are required, as opposed to being optional, that cost gets passed on to the consumer and the cost of care goes up,” says Waite. “It’s certainly been a discussion point with some of the customers we are working with.”
The tax could have an effect on the already precarious process of developing a new or improved medical device, according to Waite.
“It requires a lot of committed capital to get through that process. When you start developing a medical device — especially if it’s something that competes with another device — you have to work everything backwards in terms of how much it will cost and how long it will take to recover your investment,” he says.
“That 2.5% ends up being a significant amount of money, especially if you’re a small company, or a startup and you’ve created this financial model. Even if you have something that is easier to use [than a competing product] it can be difficult to compete against an incumbent with an established market,” says Waite.
Industry trade association AdvaMed, which advocates a repeal of the provision, says the device tax could lead to as many as 43,000 lost jobs in the industry, or roughly 10% of the work force. The tax would cover all devices sold in the United States, regardless of where they are made.
“It will have a disproportionate impact on small companies. They are struggling to get their first penny of profitability and this is going to make it that much harder,” says Wanda Moebius, AdvaMed vice president.
There are 1,700 employed in the medical technology industry in Maine, with a $693 million impact on Maine’s economy, according to data from AdvaMed.
Annually, the United States exports $5.4 billion more in medical technology than it imports. “There are very few manufacturing sectors that can say that. We want to be able to maintain this global leadership,” says Moebius.
By some accounts, the projected impact of the tax is exaggerated. AdvaMed says sales will decline by as much as $6.7 billion, but the medical device market — trading in products that are often more of a need than a luxury — has been historically resilient to such fluctuations. According to a 2006 study from Mathmetica Policy Research, a 10% increase in price results in a 2% drop in sales.
While the impact of the tax is not yet clear, Moebius says the outlook isn’t very rosy.
“Each company will have to decide for itself how it’s going to deal with impact of tax, but all those [impacts] are negative,´ says Moebius. “They are either going to have to cut employees, cut research and development or raise prices.”
Keri Seitz, president and CEO of FHC Inc in Bowdoin, says based on last year’s numbers, the device tax could shave up to 17% off the company’s revenues.
“That’s enormous,” says Seitz, whose company pulls in around $10 million a year manufacturing electrodes and other medical devices for neurosurgical and neurological applications.
While Seitz says FHC is considered a market leader in its niche, the company is still relatively small compared with industry leaders like Medtronics and Boston Scientific. FHC employs 70 people in Maine and operates offices in Colombia, Romania and Pennsylvania.
Having maintained modest growth during the recent economic downturn, Seitz worries the tax will affect the company’s ability to invest in our R&D. Additionally, it will be tough not to pass the cost on to customers, a major reason she supports a repeal of the measure.
“Manufacturers are going to have to pass this [tax] on to customers; it won’t do anything more than raise the price of health care,” she says.
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