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Tax Hikes For Medical Technology Industry Take Effect

On January 1, 2018, an Obama-era excise tax on medical device manufacturers went back into effect following a two-year suspension. The 2.3 percent excise tax was originally imposed in 2013 to support the Affordable Care Act. Republicans voted to suspend the tax in 2016 and 2017, presuming that it would be completely eradicated before 2018. Many Democrats, including those from affected states like Minnesota and Massachusetts, also supported the suspension. But the tax was not ultimately abolished, as the GOP failed to repeal the Affordable Care Act.

Industry leaders hoped that the tax overhaul that President Trump recently signed into law would suspend the excise, but it did not do so. This means increased costs for companies that produce equipment ranging from insulin pumps and glucose meters to heart stents, catheters, and artificial joints. To be clear, an excise tax is either an ad valorem tax based upon the seller’s inventory valuation of finished goods, or it’s a sales tax imposed at some point along the chain. As things now stand, the Medical Device Excise Tax (“MDET”) is levied upon manufacturers and importers, not upon the ultimate purchasers (buyers or users) of the products subject to tax. It’s naive, though, to think that such a tax doesn’t figure into the pricing set by the manufacturer, importer, or distributor.

The medical device industry generates $150 billion in sales a year. Groups like the Advanced Medical Technology Association (AdvaMed) and the Medical Imaging & Technology Alliance fear that the excise tax will reduce sales by $20 billion over the next ten years. J.C. Scott, the head of government affairs at AdvaMed said that historically, such expenses come out of product development, research, and employment costs associated with both: “We fear we will see employment freezes or reductions and a slowdown in the pipeline for medical innovation.”

AdvaMed’s CEO wrote a letter to the President on December 20, urging him to repeal the tax and to order the IRS to give affected companies “administrative relief” from the tax. In his letter, Scott Whitaker insisted that “retroactive action by Congress next year cannot fully undo the impact of allowing this tax to be triggered on Jan. 1.” Whitaker cited U.S. Department of Commerce statistics showing that the sector lost nearly 29,000 jobs while the tax was in place.

Proponents of the excise note that the industry will benefit from the overall reduction of corporate taxes from 35 to 21 percent. These supporters further argue that the ACA supported the industry by increasing the demand for medical devices. But because the device tax is levied on sales, rather than income, smaller firms and startups within the industry will not be protected by the corporate tax changes. In fact, one-third of device makers within the industry have less than 20 employees. These smaller companies may have promising technologies, but they have not yet yielded great profits. Take, for example, Bigfoot, which is a successor to Asante, and Beta Bionics, which is working to make a dual-chamber insulin pump in collaboration with Boston University. Such developers rely upon sponsorships and grants from diabetes care companies and venture funds.

The next tier of affected device-makers includes domestic corporations with international distributors, such as Tandem, Dexcom, and Insulet. The excise will have the least consequence on multinational companies like Bayer AG and Medtronic, depending on what the IRS does in the way of regulation later this month. These organizations are large enough and recognize enough of their income outside the U.S. that an excise tax on units sold in the U.S. will probably not translate to a material increase in cost of operations that is significant enough to increase prices to U.S. consumers.

Industry leaders say they will continue to push for repeal or suspension. Congress will have further opportunities to retroactively repeal or suspend the bill. For instance, there is an opportunity in connection with a spending bill that must be passed by January 19 to keep the federal government operational. However, some lawmakers, including Sen. Elizabeth Warren, have indicated that they will not vote to repeal or suspend the tax unless it is replaced by a comparable source of revenue.

Sources:

https://www.boston.com/news/national-news/2018/01/01/tax-on-medical-devices-to-resume-after-2-year-suspension

https://www.forbes.com/sites/brucejapsen/2017/12/20/medical-technology-firms-to-trump-gop-forgot-to-axe-the-device-tax/

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