Thanks to Sherri's earlier post, we've begun to explore the landscape of the medical devices industry in reaction to the 2.3% tax on revenue for medical device companies as a result of the Affordable Care Act. The tax is being implemented in part to fund the estimated 30 million additional Americans that will be provided with health coverage.

Of course, no political issue would be complete without two sides forming and lobbing verbal bombs at each other. As a result, my next two posts will consist of a deeper examination of the two sides: why the tax stands to benefit the medical device industry, and why the tax will harm the industry.

This week, we'll look at the "Pitfall" angle of the tax because, let's be honest, a post about taxes automatically carries a negative connotation. Thanks to an article forwarded to me, I'll briefly discuss the negative criticism directed toward the tax: its manifestation, faulty justification, outsourcing of U.S. jobs, and current actions.

What is the 2.3% tax? The tax will require 2.3% of revenue be paid to fulfill the requirements of this tax. The ramifications? It will take more time for companies to be profitable. While many new products and a large volume of research and development is conducted by small firms, they will now be required to pay 2.3% of all revenue, before any profit is calculated. The reaction? Investors are reluctant to invest because of a longer time to a return on investment. Also, add "budget cuts" to the list of unsavory consequences. The money to pay for the tax has to come from somewhere, leaving less money to go around for innovation.

While the concerns above may be founded, many supporters state that the inflow of 30 additional Americans feeding into the healthcare system will make-up for the money needed to pay for the tax (we'll discuss this claim further next week); however, some analysts are saying that rationale is faulty. In the article, Matthew Dolan, a senior research analyst at Roth Capital Partners, refers to Massachusetts' similar healthcare reform and the subsequent decrease in sales. Furthermore, Mr. Dolan points out that the noticeable inflow of patients will not occur until 2014. The tax goes into effect on January 1, 2013.

It's no secret that many more medical device companies are moving to get approvals, clearances, and registrations elsewhere around the world. In fact, even RQS clients have engaged us in regulatory strategies following the same mindset. Now, the 2.3% medical device revenue tax is forcing business expansion beyond the US shores. The article notes that Cook Medical, a company with 10,000 employees within the United States, is concerned about expanding their business in the United States. Even with their push against international expansion, even Cook is finding they are in the position where international expansion is a business inevitability rather than a convenience.

Now, in all fairness, not all companies are blaming the tax for everything. Even the assertions in the article (and a few smaller articles I have read) note that there are many companies making business decisions - expansion, regulatory strategy, layoffs - without blaming it on the tax. With that said, many companies are forward about blaming the tax for recent layoffs. A MassDevice.com article (subscription required for full article) makes the statement that the industry is "molting at a reptilian rate", with most of that shedding blamed on the tax.

As with everything anymore, people talk. Experts speculate. And, ultimately, most of the time we work ourselves into a tizzy because there exists no true way to forecast the impact of every change. The best we can do is to evaluate both sides and best prepare for the impending change. Next week, we will take a look at the positives of the medical device tax.

-RTK

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