As its effective start date nears, there is rapid growing debate around the medical device excise tax; a 2.3% (of revenue) excise tax on medical products not sold over the counter directly to consumers.  Government excise taxes have been in place since the late 1800’s and today exist on alcohol, fuel, tobacco products, firearms, transportation, communications, and more.  Historically, excise taxes have led to higher costs to the end consumer.  Will this medical device excise tax be different?  It’s not likely.  In fact, this one may be worse than others as it may slow medical product innovation and new product introduction, where the United States is currently the worldwide leader.  Countries with aggressive growth rates in medical product development could surpass the innovation lead that the US currently has if US innovation is slowed by any means.

As a medical device manufacturer, Cogmedix is not subject to the medical device excise tax (we are not the manufacturer of record or importer) directly.  However, a significant amount of medical device companies and many of our current and future customers will be subject to it, therefore, Cogmedix, and any other medical device contract manufacturer, could be an indirect recipient of “tax affect byproduct” if our customers’ businesses are negatively affected.  If the excise tax leads to higher healthcare rates and a deterioration of our innovation leadership position, everyone should have an interest in this topic, not just medical contract manufacturing companies.

One issue that many seem to agree is problematic is the way the tax is being levied against a company’s revenue versus against its operating income (or better yet, abandon the idea and develop different ways of healthcare management or saving/raising the appropriate funds).  There have been articles and posts on this particular topic for two years now.  As we get closer to the 2013 launch date of the tax, blog posts, articles, and news features can be found daily on the topic.  If you haven’t yet thought of what this tax could mean to a company, or perhaps to your own company, it’s worth sitting down to contemplate the math.  Levying a 2.3% tax on a particular company’s revenue may result in a tax value that consumes all (or more than 100%) of the company’s earnings from operations.  This may have significant ramifications for many companies of various sizes given it is generally earnings that allow continued reinvestment into product innovation and the people responsible for that innovation.  The tax could be catastrophic for small to mid size companies, which is where a significant portion of new product innovation begins.

While there are some exemptions depending on the FDA product class and value of the product, as well as discounted taxes for medical device companies under $25M in revenue, the overall affect won’t be positive.  Several positions and articles have been authored that state the tax could also jeopardize patient care and the current position of the US as the global medical device innovation leader.  It’s not hard to believe this, given the costs and ROI timelines that medical device companies face today, never mind adding the new tax.

Some companies may be forced to find other means of offsetting a portion of the tax, such as work force reductions, delayed new product introduction schedules, relocation outside the US, and more unique corporate structures where tax savvy companies will reduce their exposure by the way they manage their devices’ first sale transaction, which is when the tax is levied.  Many studies and corporate statements report that the tax will result in work force reductions and, unfortunately, one of the top five states in the country this will affect is Massachusetts, with a significant medical device innovation community.  Some studies go as far to say that the tax will be significant enough to motivate entrepreneurs to consider other markets and abandon their efforts in the US with respect to medical product development.

Will this tax be the straw that breaks the camel’s back and begin to slow our leadership position in medical device innovation and new product introduction?  Companies won’t simply be able to increase pricing to their customers as that will likely be controlled one way or another; e.g., reimbursement rates. However, if they could raise prices to offset the tax, it simply leads to an increase in health care costs for everyone – whether it’s you, your hospital, your insurance company, your taxes to cover additional Medicare and Medicaid – someone pays.  We need to foster and grow medical device sector jobs and entrepreneurial energy and leadership if we want to remain a world leader in medical device innovation.  In my opinion this excise tax is contrary to that effort.

Matt Giza
Vice President and General Manager