July 3, 2014

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First do no Harm


First do no Harm

The Impact of the ACA on Medical Device Companies

Spencer Sutherland

July 3, 2014

With legal fights, implementation delays and a massive online meltdown, the launch of the Affordable Care Act has been anything but smooth. Despite the rocky rollout, eight million Americans eventually used the new online exchanges to purchase health insurance—and millions more have benefitted from the ACA’s mandated benefits. Some of these new benefits—like the removal of preexisting conditions and extended coverage for young adults—have been lauded by those on both sides of the ACA debate. But they don’t come free.

So who’s footing the bill?

It’s not fast food chains, tobacco companies or other industries linked to deteriorating health or rising healthcare costs. Buried in the 20,000 pages of ACA regulations is an excise tax on medical devices like pacemakers and defibrillators. According to the Congressional Budget Office, the 2.3 percent tax on the sale of medical devices is projected to raise close to $30 million to help fund the ACA. It’s no surprise that not everyone is pleased with this arrangement.

In support of the 100-plus medical device companies in Utah, Sen. Orrin Hatch pushed a budget resolution to repeal the tax. “This tax on medical devices simply must go,” Hatch says. “It is a drain on innovation, on job creation and on our ability to provide ground-breaking medical technologies to patients.” Despite bipartisan support, Hatch’s amendment has never reached the Senate for a vote.

What’s the Big Deal?

Why are Hatch and others spending so much energy on such a small tax? Though the medical device tax is only 2.3 percent, it is levied against the sale price, not the profit. That means a company with a 20 percent profit margin—typical for many small device companies—could see a reduction of 50 percent in profit.

Larger companies with higher profit margins, like Salt Lake City-based Merit Medical, are also feeling the sting. “In my case, it’s taking about 25 percent of my net income away,” says Merit CEO Fred Lampropoulos. “Think about losing 25 percent of your paycheck. Imagine what type of pressure that would put on you. It’s had a huge impact on our business.”

In addition to the tax itself, companies are also faced with a hefty administrative burden. The tax must be reported and paid every two weeks—a major undertaking for smaller companies.

Passing on the Cost

Though the tax is targeted at the device industry, it seems likely that the cost will eventually trickle down to consumers. “The feeling I’ve gotten from the people in the industry is that it’s going to be passed on the end user,” says Mitch Bedke, president of Finance Capital, a Park City-based commercial finance company specializing in medical equipment. “If the government were to raise the gas tax by five cents, it would be passed straight on to the consumer. No one would expect the gas company to eat that.”

For the time being, however, most medical device companies have simply absorbed the tax. “It’s very difficult to pass a price increase on to a hospital,” Lampropoulos explains. “It puts you in a tremendous cost and competitive disadvantage to raise your prices.”

Rather than dropping prices, device companies have been forced to cut costs in other areas—including staff. Companies large and small have scaled back on hiring and have even resorted to layoffs.

“Fortunately for Merit, we were able to cut back on discretionary spending like travel and marketing, rather than reduce personnel,” Lampropoulos says. While employees at Merit have kept their jobs, there have been other consequences for the company—and the state of Utah.

The Ripple Effect

Lampropoulos explains that the tax will have impacts far beyond the walls of his own company. “Losing $5 to $8 million per year means there’s a building I don’t build or research I don’t do,” he says. “When you’re in manufacturing, someone has to make the box, make the package, ship the package. All of these things are impacted. It’s a ripple effect well beyond just the tax and just the [device] company.”

Because medical devices sold overseas are exempt from the tax, device companies are taking money out of the United States and investing it abroad. “If you had a choice of selling something to me for $3 or you could ship it to Europe and get $5, what would you do?” Lampropoulos asks. “We set up sales forces and marketing programs where we get better returns. All of those things affect Utah.”

The state is also impacted by a reduced number of sponsorship dollars. “We would normally take 5 percent of our pre-tax profits and donate them to education, the arts, science and various charitable organizations,” Lampropoulos explains. “I just don’t have that money [now]. Rather than lay off employees, I chose to pull back on that.”

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