I just returned from an interesting industry forum at Children’s Hospital, Los Angeles, one of the premiere pediatric and neonatal intensive care facilities in the U.S. I work with the Center forTechnology and Innovation in Pediatrics and, believe me, it’s a labor of love. It was exciting to hear from some CEOs, including Tom Thornbury from Neotech (see photo of one of their neonate devices), about what they’re doing to solve the problem of using adult devices on babies and children, which, by the way, does not work so well. One of the issues that came up on the panel was the new tax on medical devices and the impact it might have on small businesses and on innovation.
In case you weren’t aware of it (it does impact you), this is another of those surprise taxes that we’re discovering in the Affordable Care Act (an oxymoron of a name if there ever was one). A 2.3 percent tax is assessed to manufacturers and importers of medical devices that are listed with the Food and Drug Administration, essentially all those devices that have made the U.S. the world leaders in medical innovation. Medical devices are ubiquitous in the healthcare system from stethoscopes to robotic surgery.
What is really painful about this tax is that it’s assessed on sales rather than on profits and the effect is to eat at the meager profits that small entrepreneurial firms might make in the early years. For example, let’s say that your medical device firm sells $3 million worth of product in the first year of sales; after deducting research and development costs, profit amounts to $112,000. However, because the 2.3% medical device tax is based on sales ($3M*2.3% = $69,000), the small firm’s profit is actually only $43,000—not much to plow back into the business for further R&D. In short, the tax confiscates about 62% of the company’s profits. What’s more, small device companies that often make no money in the first 2-3 years, still have to pay the tax! Imagine trying to come up with $69,000 in a year when you made no money.
Of course, investors take all this into account when they consider whether to invest in medical device startups, and CEOs reconsider plans to expand with new plant and equipment expenditures. One Indiana company has already cancelled expansion plans, while a Massachusetts-based company will suffer a loss of 15% of its research and development resources due to the tax. St Jude Medical has already laid off 800 employees since last August as it tries to balance the approximately $60 million the tax will cost them in 2013.
If you’re wondering why anyone would put in place such an onerous tax that will impact all of us (our cost of healthcare goes up and quality goes down), look no further than the Affordable Care Act, which needs the tax money to make the act more affordable! And I haven’t even mentioned the cost to business of compliance! This is matter of survival for these companies and some of them have chosen to pass along the tax to the hospitals that purchase the devices. Naturally, the hospitals aren’t happy about this because they’re also struggling to do more with fewer resources. Ultimately, it’s we the consumers who get hit with the cost of these taxes.
A glimmer of hope remains that organizations like the Medical Device Manufacturers Association (MDMA) will succeed in their efforts to get this tax repealed so that innovation and job creation can thrive. One can only hope because, frankly, I’m seeing a lot of really beneficial pediatric devices early in the pipeline, and I’d hate to see them get the ax because it doesn’t make financial sense to develop them.Our kids deserve more.
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