From The Editor | February 2, 2018

The Medical Device Excise Tax Is A Disaster!


By Bob Marshall, Chief Editor, Med Device Online

The Medical Device Excise Tax Is A Disaster!

Mark Leahey, President and CEO of the Medical Device Manufacturers Association (MDMA), recently issued a statement in response to President Trump’s State of the Union Address, "While the passage of an additional two-year suspension of the medical device tax is a recognition of how important it is to bolster America’s leadership position in this industry, Congress must permanently repeal this disastrous policy in order to fully realize the long-term investments in patient care and job creation that are critical to growth.” Did he really say – disastrous? Oh yes he did!

Does 2.3 percent really seem like an overly burdensome tax? Many people pay personal federal income tax that is 10 times that or more. But this is where some of us may be getting confused. The medical device excise tax was not being levied on a medical device company’s net earnings. The tax was applied to the company’s gross sales of medical devices. If we look at a specific example, perhaps it becomes a little more apparent why the device industry, its advocates like MDMA and AdvaMed, and legislators (especially those from states with prominent medical device industries like Massachusetts and Minnesota) have fervently opposed this tax.

In 2015 (the last year before the device excise tax was suspended) medical device manufacturer Stryker, headquartered in Kalamazoo, Michigan reported Net Sales of $9.95 billion dollars. That means Stryker paid approximately $229 million in medical device excise tax for calendar year 2016. However, even though $229 million is a significant number, it pales in comparison when standing next to a net sales number of almost $10 billion. We see press releases reporting the performance of medical device companies and think – those companies are making tens of billions of dollars why shouldn’t they pay their fair share? What’s a couple percent to help out Uncle Sam? However, they aren’t making tens of billions of dollars; they are selling tens of billions of dollars of medical devices. To sell those devices they have to make tremendous investments in people, plants, equipment, and materials.

When you look at the financial impact of the tax versus a company’s net earnings, it tells a different story. In 2015 Stryker reported Net Earnings of $1.44 billion, so the device excise tax of $229 million equated to nearly 16 percent of Stryker’s bottom line income. Bear in mind also this is completely separate from, and in addition to, traditional corporate income tax.

Many people may be thinking – So what! Medical device companies make a lot of money. But what are the potential impacts of significantly reducing their bottom line income? Well, first of all, many of them are public companies and if you own medical device stock, or your retirement fund invests in medical device companies, you lose earning and/or dividends. In addition, medical device companies may have to reduce staffing, delay hiring, and cancel portions of their research and development efforts. That is not good for any of us! Advances in healthcare technology save lives and improve the quality of life for all of us. Another negative consequence is the decrease of venture capital (VC) investment in earlier stage medical device companies. VC investors take significant risks to make cash available to fuel innovation, but in return, they expect significant payback. The medical device excise tax puts a “drag” on their willingness to take risk and results in fewer deals.

One way that medical device companies could counter the tax would be to raise prices at the point of sale to offset the impact of the tax. But that would make the medical device tax simply a pass-through rendering an already expensive healthcare system even more expensive.

What’s your perspective on the medical device excise tax? The idea that everyone should have healthcare coverage seems like a good idea to me on the surface. How can you disagree with the basic idea? The problems begin when we get down to the question, “who is going to pay for this?” I mean when I have the opportunity to go out for a nice dinner with my wife, I am very fond of surf and turf. However, I am not so fond of it later when I get the bill – should have had the chicken! I realize that these are different things; a fine dinner is a luxury, while social justice points us toward viewing healthcare as a necessity. Though perhaps the best way to look at it is to consider how it is defined by an employer who provides a health insurance program for its employees. It is called a “benefit.”