Medical Device Excise Tax to Cost Industry $20 Billion

Industry-specific taxes are nothing new on the American business landscape, but the upcoming excise tax to be levied against medical device manufacturers has caught many companies by surprise. In an unprecedented move, Congress has tucked a medical device tax into legislation that is designed to help pay for expanded health care coverage in the United States. The 2.3 percent excise tax would be charged directly to medical device manufacturers, based on the gross sale price of each affected product.

A 2.3 percent excise tax on its own sounds innocuous, which was no doubt by design on the part of the members of Congress who drafted the measure. However, when applied across the entire medical device industry, the tax represents $20 billion in revenues over a ten year period. Industry groups argue that this money could be much better spent by medical device manufacturers researching innovative new products that would go a long way towards reducing the costs of medical care. This would provide both a higher standard of health for American citizens as well as the cost savings that the excise tax is meant to offer the federal government.

Despite this argument – collectively presented to Congress through the lobbying efforts of more than 400 affected health care organizations – the only progress that has been made in terms of mitigating the impact of this excise tax on medical device companies has been the halving of its original $40 billion value over the same time frame. The tax is set to go into effect in 2013, and since it is tied to revenues and not reported profits it will allow the federal government to tax both industry giants and fledgling manufacturers struggling for a foothold in the market. The excise tax targets almost all products, with the exception of Class I devices sold directly to the public via retail outlets.

It is difficult to understand how an excise tax targeting medical devices is aligned with the stance that both the Obama White House and the FDA have taken towards encouraging technological investment and accelerating medical device development. This type of excise tax would seemingly deprive companies of the funds required to push the limits of health care treatments, effectively penalizing medical device manufacturers for developing popular products. Certain regions of the country, as well as specific companies will be hit particularly hard – it is projected that Minnesota firms will end up shouldering 25% of the total tax load, and Medtronic alone would owe over $300 million based on last year’s earnings.

Five pieces of legislation have so far been proposed in order to combat the negative effect of this excise tax on medical device companies and health care innovation in America. The Medical Device Manufacturing Association is also calling for the IRS to institute a one-year moratorium on implementing the tax. MDCI will continue to follow this story and report on whether these lobbying efforts are successful in altering the excise tax in its current form. If you or your company feels strongly about fighting this medical device excise tax, the team at MDCI recommends that you contact your representatives in government and show your support to industry organizations fighting against the imposition of this levy.

Benjamin Hunting
MDCI Blogging Team

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