Devicemakers Planning To Cut Back on R&D to Pay for Excise Tax

Nearly half of devicemakers (44 percent) in a recent survey said they would pass the costs of the new medical device excise tax on to their customers.

An additional 39 percent said their companies would absorb the costs internally through R&D cuts (50 percent), layoffs (25 percent) and moves to manufacturing overseas or lower-cost regions of the U.S. (25 percent), the survey by the Massachusetts Medical Device Industry Council (MassMEDIC) found.

Seventeen percent of those surveyed didn’t comment on plans, MassMEDIC President Tom Sommer told D&DL.

The survey bolsters widespread industry concerns that the impending tax will force companies to raise prices or cut jobs and research budgets. Other state groups have heard similar concerns from their members.

“Our medical technology member companies are considering various measures in response to the pending imposition of the medical device tax, including impact to employment levels and research and development,” said Dean J. Paranicas, president of the HealthCare Institute of New Jersey.

California’s group is hearing the same thing, David Gollaher, president of the California Healthcare Institute, told D&DL. “There are only two ways to deal with the impact of the tax” and they are cutting spending or raising prices, he said. Taking the tax out of profits won’t work for companies that aren’t yet profitable or ones with slim margins, he added.

The Massachusetts survey found devicemakers largely unprepared for the new tax — perhaps a sign they are waiting to see whether the U.S. Supreme Court overturns President Barack Obama’s Affordable Care Act (ACA), which mandated the device tax. With less than a year until it takes effect, only 25 percent of devicemakers reported having systems in place to comply with the tax, the survey found.

Companies May Restructure

The ACA requires devicemakers to pay a 2.3 percent duty on sales of most devices beginning Jan. 1, 2013. MassMEDIC surveyed 42 senior medtech executives in February about their plans and readiness for the tax.

“We warned two years ago that medical device companies would be forced to deal with this tax by preparing for job cuts and reductions in R&D spending,” MassMEDIC’s Sommer said. “The U.S. leads the world in developing and manufacturing medical products; it doesn’t make sense that on one hand the government is promoting exports and manufacturing jobs, while on the other hand it is implementing policies that will cut jobs in this sector and harm its competitive advantage — the development of innovative medical technologies.”

Medtronic Chief Financial Officer Gary Ellis has said in published reports that the company is prepared to cover some of the costs and pass others along to purchasers. And Cook Group Chairman Steve Ferguson told an Indiana University forum he expects the tax to reduce healthcare profits by 15 percent. Cook plans to limit investment in the U.S. as a result, he said.

Meanwhile, Stryker plans to reduce its global workforce by 5 percent beginning in 2013. The restructuring will help the company comply with the device tax, spokeswoman Tamara Cutler told D&DL.

Industry has long attempted to block the tax, most recently by considering attaching anti-tax language to the must-pass Medical Device User Fee Act reauthorization bill (D&DL, Feb. 13). A separate bill to repeal the tax, introduced by Rep. Erik Paulsen (R-Minn.), has 29 cosponsors and is now before the House Committee on Ways & Means. — Elizabeth Orr

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