June 07, 2018
by Thomas Dworetzky , Contributing Reporter
A new Iowa State University study looking at data from 2006 and 2015 shows that firms have cut R&D thanks to the Affordable Care Act’s medical device tax.
“Highly advanced equipment in hospitals is a critical aspect of medical care,” said Daeyong Lee, an assistant professor of human development and family studies at ISU. “Some devices, such as coronary stents, require high research investment. If medical device firms stop or reduce that investment, we won’t have better equipment and devices for complicated surgeries or procedures.”
His study, which is appearing in the journal Research Policy, looked at the 2.3 percent excise tax imposed on medical devices in 2013.
“The medical device tax significantly reduced the R&D investment, sales revenues, gross margins, earnings, and return on equity for medical device manufacturing firms,” said Lee.
The cuts he found included:
-R&D expenditures – $34 million
-Sales revenue – $188 million
-Gross margins – $375 million
-Earnings – $68 million
His research looked first at the real cost to makers but, discovered that the tax also hit operating and marketing costs.
The tax is surprisingly broad, too. It doesn’t just hit the high end but, is slapped on everything from needles and syringes to coronary stents, defibrillators and irradiation equipment — although it does exempt hearing aids, eyeglasses and contact lenses.
Lee also looked at different ways to mitigate the tax impact for firms, including raising prices, which did not really happen, he said, because of the buying clout of the bigger consumers like large hospitals and clinics.
Instead of bumping up pricing, medical device makers have responded by spreading out their customer base and boosting international sales – which don’t get hit with the tax.
“The device tax significantly increased their international sales revenue, international diversification, and customer diversification in the U.S. markets,” stated Lee.
Firms also slashed sales operating costs and general and administrative overhead but, continued to spend for advertising and labor.
The congressional appropriations act in 2015 had a two-year moratorium on the medical device excise tax. Then, in January, that was lengthened until 2020, at which time, industry leaders praised the decision.
“AdvaMed applauds passage of the two-year suspension of the medical device tax,” president and CEO Scott Whitaker of the Advanced Medical Technology Association said in a statement at the time. “This suspension is good news for American patients and American innovation. Congress’ action – just days before medical technology innovators were set to start cutting checks to the IRS – means funds will not be diverted from current investments in jobs, capital improvements and research into new treatments and cures.”
And Patrick Hope, executive director of the Medical Imaging & Technology Alliance, told HCB News prior to the passage of the bill that, “we have information from the U.S. Department of Commerce that showed once the tax went into place, its direct impact on the economy was a loss of nearly 29,000 jobs in the whole medical device industry,” and that there was also an American Action Forum study that predicted a loss of 25,000 additional jobs by 2021 if the tax stays in effect.
Supporters of the tax, however, maintain that makers can grow their way out of the problem with a rise in medical device sales.
Lee thinks the moratorium gives policymakers time to rethink their options.
One way to reduce the device tax impact is to spread the pain, Lee suggested, by having taxes put on others, including the health insurers, who also benefit from increased demand from the healthcare reform act.
“If there is a broader tax base, the negative effects will be reduced,” Lee said. “The government needs to raise revenue to cover the costs of the Affordable Care Act, but there are other ways to do it without harming a research and development-intensive industry.”