On Dec 21, 2015, $1.8 trillion Spending and Taxation Bill for FY2016 was passed by the US Congress and signed by President Obama. As part of this bill, the controversial medical device excise tax of 2.3% that was enacted as part of the Affordable Care Act was suspended, albeit temporarily for two years. What does this tax mean to the medical device manufacturers?
For very large device manufacturers like the Medtronics or the J&Js of the world, the impact is not that dramatic. Medtronic for example budgeted $210M to pay for this tax in FY2016. While the large behemoths of the medical device industry are the go-to sellers of a wider range of devices, these companies have a pricing edge. However, smaller companies are much more susceptible and sensitive to the impact to this tax, because they cannot easily pass this on to their customers. In a survey done by the U.S. Government Accountability Office1, nearly all of the reported increase in net profit for the 102 companies surveyed came from the 30 big caps with sales of over $1 billion per year. By contrast, the 72 smaller companies surveyed reported an overall net loss over the same years. So it really impacts the small-company innovation because this tax is based on sales, not profits.
With the freeze of this burdensome tax in place, at least for a limited time, these MedTech companies have the opportunity to invest in product innovation, safe manufacturing practices, and IT infrastructure to improve business processes such as quality solutions to bring safer, reliable products to the market. There are constantly new revisions to the regulatory landscape that all these companies, large and small, must adhere to. Besides regulatory compliance, they must bring greater patient safety and efficacy into their products. Investments made into business process software, like centralized quality management solutions (a common platform to maintain all quality related data that can enable greater visibility for proactive decision making), will only help propel these companies to bring safer products to market faster and enable quick and effective resolution of product issues that might arise from anywhere in the value chain.
Ultimately, investment in these solutions will provide incremental value year-over-year through reduced exposure to regulatory and business risks while enabling greater efficiencies and effectiveness of processes. Therefore, the MedTech companies should take some of this relief and invest for longer term sustainment of quality product benefits.
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Source: Government Accountability Office “MEDICAL DEVICE COMPANIES: Trends in Reported Net Sales and Profits Before and After Implementation of the Patient Protection and Affordable Care Act”; GAO-15-635R: Published: Jun 30, 2015. Publicly Released: Jul 30, 2015.