Medical Device Tax Is Three Months Away—Are You Ready?

Medical Device Tax Is Three Months Away—Are You Ready?

Mark Crawford

Even with the Affordable Care Act (ACA) providing up to 30 million or more Americans with health-insurance coverage (and first-time, affordable access to medical devices), the medical device industry is worried about the looming 2.3-percent medical device excise tax—also a result of the ACA.

The Urban Institute, a non-partisan think tank, concluded the tax shouldn’t slow down R&D for medical device companies because they will be enjoying increased profits that will “considerably exceed the new taxes.”

Steve Ubl, CEO of AdvaMed, vehemently disagrees.

Complicated and Costly

“The medical device tax is one of the few IRS-administered provisions that take effect in 2013,” says Ubl. “Even apart from the destructive $30-billion economic burden of the tax, the mechanics of implementing it will be extremely challenging both for companies and for the IRS. It is vastly more complicated than a typical excise tax, and compliance by companies in our industry will be both costly and burdensome.”

He further suggests that the tax will force companies to cut 43,000 jobs over the next 10 years.

“The medical device tax will have damaging effects on economic competitiveness, jobs, and the research and development needed to find tomorrow’s treatments and cures,” he adds.

Cutting Back

The USA Today reports that, because of the tax, Cook Medical has suspended plans for a $15-million factory that would employ 300 people. The company has also stopped plans for four other new facilities and is seriously considering moving some operations offshore.

“Cook will no longer be able to expand our manufacturing in the United States,” Allison Giles, vice-president for federal affairs specialist for the company, told Human Events. “We’ve always resisted going abroad. As new products get developed and go to market, we will be looking overseas to manufacture those products. At some point, and I don’t know when that is, decisions will have to be made.

In a September 10 statement, Welch-Allyn announced it was planning on laying off 10 percent of its workforce over the next three years, in part due to the “onerous U.S. Medical Device Tax scheduled to begin in 2013 as mandated in the Affordable Care Act.” The company will also undertake a 90-day evaluation of its European and Latin American operations to determine “optimal deployment” of business.

“We firmly believe this restructuring program is the right thing to do for the long-term success of the business,” says CEO and president Steve Meyer. “This restructuring plan will help us maintain competitive levels of investment in new products and technologies that are necessary to meet the changing needs of the global health-care environment.”

Research and Planning are Crucial

According to Mitchell Kopelman and Ori Epstein in their informative article “Medical Device Tax 101,” published by MD+DI, the first step companies need to take is determining if the manufacture and sale or import of its devices are subject to the new tax.

“For planning purposes,” they write, “the mindset should be that, indeed, the device will be subject to the tax. This is important because it gives companies time to budget and plan for this new cost, which more than likely will impact their pricing, salaries, and, ultimately, their bottom line.”

Developing pricing models for the new tax will also be a major headache. Companies will also have to pay the tax on inventory on hand on December 31, 2012, that is not sold until January 1, 2013.

“Many companies have probably not considered this in their current pricing models,” continue Kopelman and Epstein. “The tax will also factor into the sale of a business. Regardless of whether the assets are sold or stock is sold, the tax will attach to all inventory transferred in the sale.”

A Sure Bet?

Even if Mitt Romney wins the November presidential election it is unlikely the medical device tax will be repealed in 2012; therefore companies should be prepared to make the first deposit of the tax on January 29, 2013 (the first quarterly federal excise-tax return will be due April 30).

“Many medical device companies are already planning and preparing for it,” say Kopelman and Epstein. “Companies that haven’t begun to prepare for the tax should start. Many critics are decrying the hit the medical device industry will take and are concerned about the impact to this industry. There will be many challenges ahead, but there will also be many opportunities—it will be interesting to see how companies respond in this new climate.”
 

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