When we came to put this article together, we planned a head to head on the pros and cons of this new tax, however we overestimated the number of people would be for this medical device tax, also knows as the tong depressor tax, during the research stage we interrogated a number of industry opinion leaders and canvassed opinion widely. Overwhelmingly opinion was that the medical device tax in the USA of 2.3% on revenue was a bad thing, there were occasional observations that presented this tax in a positive light, but these were very limited. Which all begs the question why is the tax being pressed ahead what is the logic behind it, these are the question we will attempt to answer below, rather than the head to head debate planned, still we will stick to the title as we did find some for it, and “Against the medical device tax” is a little negative for us.
In summary the tax is 2.3% on sales revenue for medical devices sold within the USA, the medical device industry in the USA is extremely healthy industry manufacturing about US$116 billion of products every year which went distribution costs are added brings total production values of US$139 billion. The industry employs about 409,000 people who take on wages in the region of $33 billion a year. This tax has been devised to extract additional revenues from this industry in order to pay for the improvement in regulatory performance by funding the FDA and some other industry initiatives which we were unable to tie down sufficiently in our research. The justification of implementing this tax is that as an additional 32.5 million people get healthcare coverage in the USA by 2014, and this will lead to an increase in sales for the medical device industry. Opponents of this tax however point out that when the state of Massachusetts changed its coverage policy and brought a large number of extra patients into coverage the sales of medical devices did not change significantly.
The main arguments against this tax fall into two camps; one is the usual camp of additional taxation is arbitrary, punitive, unnecessary and social engineering of the worst kind, let capitalism get on with it. The other argument is that the tax will lead to direct loss of 43,000 jobs which will reduce the wage bill by $3.5 billion. This will offset the tax revenue of 20 billion that the government is hoping to raise between 2013 and 2019, by reducing the taxable income from these workers. The first argument we will deal with in a moment, the second argument seems somewhat spurious from this authors perspective, however please feel free to write to me and point out why don’t agree with me. I don’t see it as very likely that the industry is employing people within its infrastructure for the sheer fun of it. So increasing cost should not directly reduce the numbers of workers that it requires to manufacture market distribute etc all products. This tax may drive some smaller unhealthier companies to the wall, however it has to be questioned whether this will actually lead to job losses on the scale predicted and other companies will pick up that capacity and counter the job losses.
Now the punitive aspect of this tax, there is a very important feature of this tax, in that the tax applies to revenue not profit, this is specifically engineered to avoid companies avoiding paying the tax via clever accounting methods, companies who are important to the US distributing profits to areas outside the US etc etc. A tax on revenues is much easier to ensure fair collection, however it does mean that the initial 2.3% which does not look that significant, when applied directly to the bottom line, can mean a tax increase of around 45% to around 100% depending on the company. You don’t need to be in accounting genius to work out that if you’re sales and costs remain the same you’re making a gross margin of around 10%, and a net margin of around 5% paying an additional 2.3% from the top would have a huge impact on your margins. Again this argument which may apply to a number of companies does not appear to stand up the industry average where margins of 22% and 15% are regularly quoted. So this is a point of debate.
In fact some of the people whose opinions have been gathered for this article, have pointed out that the industry should be able to increase prices and justify price those increases through innovation and new-product development and easily cover this kind of additional expenditure. There are also those the point out that the R&D budgets of many companies are pitiful and that this additional burden may further erode into the R&D expenditure, and this reduce spending will impact the future of the industry for years to come. Are we slaying the goose that lays the golden eggs for short term financial tax benefit?
There are many people who also suggest that this tax will help drive further manufacturing from outside of the USA into China and other low-cost production areas, however the fact that the tax is on revenue not on profit, so I look at this argument as somewhat oversimplified. The maintenance of growth and the pressure to remain profitable by moving to low-cost areas has always existed and been resisted. Will this new tax be just enough to tip the balance drive further companies outside of the US? However the counter pressures of quality control, management and protection of IP will still be there to counter such shifts in the manufacturing base to any large extent.
The fact remains, in 2013 this tax is going to arrive in the USA, and companies are going to have to deal with it. In terms of those who are in favour of the tax, a small number admittedly, several in the industry have commented upon the need for better funding of FDA to enable it to assist industry, and that this extra funding would be most welcome and that reduced FDA delays could pay for this 2.3% quite quickly. Again this is only opinion and I not seen any figures that backup such a comment. The people who would be most pleased with this tax are political activists, the occupy Wall Street groups, there are some people who are will enjoy seeing additional taxes levied at ” the men in grey suits from the medical devices industry”. Not wanting to reveal the authors political stance, I shall avoid getting political in this article.
Overall I am of the opinion that this tax is going to be damaging to industry, is going to drive some manufacturers outside of the US, albeit a small amount. It is likely to drive up the retain cost of some medical devices in the marketplace, however the additional revenue driven into the FDA and into the widening of healthcare participation should have positive impact on both industry and community. these positives I don’t think will offset the negative. The political aspects of any punitive tax are outside the scope of this authors remit, so all we can do is see what happens in 2013.