On January 1st, 2013, a new 2.3% sales tax went into effect for medical device companies. This new measure is part of the Affordable Care Act and will be used to provide healthcare to new customers.
The Act could provide the industry with thirty million more patients and potentially offset revenue losses due to the tax. But these diverted funds could have otherwise been used for items like research, testing, product development, new hires, and general expansion.
It is unclear how effective an increase in patients will be for offsetting lost company revenue in the short and long term. Some medical device companies do not sell directly to customers. They instead sell to medical professionals and hospitals, who often have contracts with medical device companies that make it difficult to offload extra costs. Some medical devices, such as blood pressure monitors and imaging equipment, can be used on multiple patients and would not immediately benefit from an increased customer base.
The biggest implications come from the size of the company being affected. Larger corporations may have 2.3% less money to direct towards certain resources, including hiring capabilities, but their survival and growth is generally less dependent on the top 2% of their sales. They have a greater ability to absorb this loss because of established customer bases and revenue streams that not only keep a company healthy, but result in more readily available credit.
Smaller companies are generally focused on a building a single product, establishing a market presence, competing for every sale, and finding growth capital. In order to accomplish these tasks on a regular basis, they require a constant conservation and careful allocation of resources. During the growth phase of a company, the top 2.3% of sales can mean a fulfilled inventory, an adequate amount of working capital, an extra round of testing, or the ability to begin a new product.
When growth is slowed, it limits the creation of jobs. These new roles could include production, research, testing, sales, marketing, distribution, and even applications of new medical technologies. Losing this extra money may not only take away jobs, but could hinder the ability to develop new ones.
This tax suggests that medical device companies fund their own customers; rather than losing 2.3%, companies are giving 2.3% to their customers, who will ultimately reinvest in medical device technologies. This logic makes the tax seem more like a loan. This is partially true, but this conclusion neglects the transactions that happen in between a customer receiving health care and a medical device company receiving a sale. It also goes to the doctors, the hospitals, the insurance companies, and the government before it goes to the top line of a medical device company.
This tax benefits healthcare recipients. But it is a barrier that many medical device companies, small and large, will have to overcome.
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Sources and Further Reading
http://www.massdevice.com/news/where-do-medical-device-tax-fighters-go-now
http://www.polymersolutions.com/blog/debate-over-medical-device-tax-intensifies/
http://www.beckersasc.com/asc-supply-chain-materials-management/advamed-surveys-members-on-medical-device-tax-impact.html
http://www.advamed.org/MemberPortal/About/NewsRoom/NewsReleases/10-121812ImplementMedDevTax.htm
http://www.boston.com/news/local/massachusetts/2012/12/28/medical-device-makers-jan-tax-could-cost-jobs/zZit7s9PC8frGi0StNrDiM/story.html
http://www.healthcarefinancenews.com/news/medical-device-tax-goes-effect-despite-industry-objections
