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Medical Device Tax

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In order to pay for the Nation’s new healthcare program, the IRS hopes to raise $30 billion and they don’t plan on having a bake sale to get the cash. Under the Health Care and Education Reconciliation Act (P.L. 111-152) a 2.3% excise tax will be levied on medical equipment starting January 1st, 2013. Amid growing fears that the tax will have far reaching and negative impacts on the healthcare system, both Democrats and Republicans are coming together in hopes of repealing the excise tax.

Known as the Medical Device Tax, its aim is to generate revenues to help pay for the addition of health care benefits to millions of new Obamacare recipients. But how could a seemingly innocuous 2.3% tax hike on manufacturers of medical equipment have any impact on the citizen at large? At least they aren’t increasing my taxes you might think, right? Like a Trojan horse, this tax is being ushered into our cities but once inside the proverbial gates, it could destroy many of the innovative companies that develop and build the machines which make modern medicine possible, lead to job losses and an increase in health care costs, according to John A. Sparks from the Washington Times.1

We take for granted the wondrous, beeping, chirping and dripping, life-saving machines that fill our hospital room floors and stand vigil at our bedsides when we are sick. We have come to expect that scanning MRI, Ultra Sound and X-Ray devices will help our doctors see into our bodies, diagnose, and treat our medical conditions. As my boss likes to quote from the Pearson, Sabin, Emanuel book, “No Margin – No Mission”, the Medical Device Tax slices over half of the margin, or profit, from the companies hard at work, creating and manufacturing the equipment that make American modern medicine possible.

The attentive reader might ask how could a measly 2.3% tax confiscate over half of a business’s profits? First, this tax is imposed on revenue, not profit, like most commerce taxes. To understand, if a business develops and makes an MRI machine that generates $1 million in its first year of sales, but has only seen an actual profit, after all business expenses, of $40,000 the company would be taxed on that $40,000. The government would take its share of the profits. However, this tax is levied on revenue, not profits. Instead of taking a percentage of the $40,000 profit, the government will take 2.3% off the $1 million in revenue or $23,000. That’s 58% – more than half the company’s profits – if they even have profits. It may take years for the revenue from a new device to generate a profit but the company is required to pay out 2.3% on revenue, regardless, ensuring many companies could be forced to close their doors.

Foreseeing the negative impact, the tax will have on the financial future of the medical technology industry, investment in health care technology companies has already begun to retreat, reaching anemic levels. Elizabeth McDonald, noted business journalist explains that capital funding for the medical equipment industry during the third quarter of 2012 reached the lowest it has been in almost a decade.1 According to a Price Waterhouse Coopers paper published August 2011 a broad coalition of medical technology companies and leading associations consisting of over 400 companies, the U.S. Chamber of Commerce and other investment firms all believe the new tax will lead to job losses, reduction in research and development and burdensome administration. The tax will “harm patient care and thwart innovation and job creation at a time when we can least afford it, “ said Mark Leahey, President and CEO of the Medical Device Manufacturers Association (MDMA).2 Bruce Josten, Executive Vice President for Government Affairs at the U.S. Chamber of Commerce echoes Leahey’s statement saying that, “Allowing the medical device excise tax to take effect would undermine patient care, stifle innovation in medical technology, and further damage our economy.”3

The Medical Equipment Tax has US manufacturers of medical products scrambling to raise prices, eliminate jobs and revise their business strategies. Congress wants you to think the tax won’t affect the general consumer since it’s not imposed directly on you. Remember, “No Margin – No Mission” and without profits, the medical device industry will languish,  irreparably damaging healthcare on the whole.  Although it’s aim was to raise money to pay for Obamacare, the Medical Device Tax may hobble the health care system it is intended to fund.

How do you think the Medical Device Tax will impact you and your healthcare?

Craig Hood is Executive Vice President of Scrip Companies and Founder of Allegro Medical (AllegroMedical.com), the leading online supplier of medical equipment and home health care supplies.

Sources:
1The Washington Times – “Obamacare tax on medical devices hurts jobs and health”

http://www.washingtontimes.com/news/2013/jan/15/obamacare-tax-on-medical-devices-hurts-jobs-and-he/

2Medical Device Manufacturers Association (MDMA) – “Broad Coalition Urges Congressional Leaders to Repeal Medical Device Tax”, July 18, 2011

http://medicaldevices.org/node/1039

3Price Waterhouse Coopers (PWC) – Medtechfocus, “Med tech companies further debate over US competitiveness, raise question about impact of excise tax on innovation”, August 16, 2011 http://pwchealth.com/cgi-local/hregister.cgi/reg/medtech-focus-on-excise-tax.pdf

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