On Death (of Innovation) and Taxes
I found a recurring theme wandering the booths at the recent MD&M East show. It was one of the genuine unease the industry has towards the controversial US medical device tax introduced on December 31, 2012. It’s clear to see from the maelstrom of debate that swirls around Twitter and LinkedIn that the policy jars uncomfortably with many of the major device manufacturers. But why?
Taxes are never popular—period, so what’s special about this one? In essence it’s an easy tax to follow—a 2.3% levy on the sale price of the medical device.
The concerns are straightforward. The tax is expected to eat into the industry’s profit margins, either at the point of sale with higher prices passed on to buyers to allow for the tax, or, and the more likely, at the expense of the manufacturers or their suppliers. The argument from many in the industry is that a consequence of the tax is that R&D may suffer as cash is constricted. Less R&D could mean innovation suffers, and costs going up, put simply, because it’s the innovation that keeps the costs down.
Supporters of the 2.3% tax on the sale price of the medical device point to a startling statistic. Healthcare spend in the US is around 25% of GDP—far more than military spending. And it’s the potential rise in this spending that the Affordable Care Act, or as it has come to be known, the “Obamacare bill”, attempts to address. Supporters of the tax also see the Obamacare bill as an attempt to help America’s poor gain better access to its healthcare services. A laudable sentiment in principle, but what impact is it having?
As Larry Acquarulo of US medical polymer supplier Foster Corporation told me: “A couple of larger device companies are on their heels—Boston Scientific, Abbott and Medtronic have all cut staff”. Indeed AdvaMed, the USA’s largest medical device manufacturing industry association, is lobbying hard against the tax (even trying to repeal it!) according to Larry, AdvaMed’s position is that the tax will create higher, not lower, prices for medical devices as the costs are passed on to the buyer.
There’s a real frustration from the manufacturers over the tax. It essentially isn’t a medical device excise tax as such, it’s a manufacturer’s excise tax.
A popular opinion is that the medical device market has been the most competitive form of manufacturing output in the US economy. Larry illustrates this: “The medical device industry has already proved to be the most competitive industry out there; the average price increase of medical devices over 20 years has been only about 1% per year, much lower than the cost of inflation.”
Dan Lazas, president of Lazas Marketing Group, goes on to make the point: “What it comes down to is you need a lot of innovation—smaller, better yields, less waste, you got to stay ahead as the next guy is right behind you. And it’s this innovation that has kept the price inflation of medical devices low. A tax on gross revenues will eat into this ability to innovate—and prices will rise.”
Larry concurs: “The reason the industry has been so competitive and been able to keep their prices low is that they have been able to put the money up front in innovation and new technology to develop the next thing that saves money. And if they are unable to do that because of short term thinking along the lines of ‘we need to cut our cost’ it’s going to affect R&D. You’ll have the same kind of products on the market for longer and this is not good.” He goes on: “It’s the innovation that enables the costs to stay low.”
Having said all this, it’s over half a year since the medical device tax came into force and, true, some of the big multinationals have announced major layoffs earlier in the year, but it seems to be business as usual, Armageddon has not happened yet. Can responsibility for these layoffs really be put at the door of Obamamcare, or would these have happened in the downturn anyway. It’s difficult to know.
All this said there are corners of the industry where the tax is actually thought of as, well, certainly not the end of the world—let’s put it that way.
Ryan Heniford, business development director at medical textile and polymer development manufacturer Secant Medical, takes an opportunistic approach to the device tax. He’s looking at making the most of the situation: “There will be pricing pressures for standard-type devices, so if you’re in that business, you’re going to see your margins drop.” He goes on: “If you can dedicate some of your development funds and be smart with the money you do have, we feel there’s an opportunity to take advantage of the pressures that the industry is seeing. The key is to create a procedure-specific device that is going to have quick implantation times and low recurrence rates, because OR [operating room] time has a huge influence on the ultimate total cost of care. I see it as an opportunity to create innovation and increase margins by solving the problem in one procedure. However, that’s an ideal world, and there’s a lot of work that goes on behind the scenes, including building the partnerships needed to make that happen in an environment where there’s less money to go around.”
Larry Acquarulo sums it all up nicely: “I see this [the tax] as a challenge, but I think we’re going to get it right, we have hit this road block because of the Obamamcare and everyone is holding back just a little.”
These are interesting thoughts, which throw a new light on the debate. At this year’s MD&M the mood was one of quiet optimism. For many of those that I spoke to, it felt as though the worst was over. It was head down and, as Churchill once said, “keep buggering on”. It will be a slow rebuild but steadier times are indeed here.
Despite industry grumbles and full time lobbying from groups like Advamed, the tax looks here to stay. Here’s the deal. Let’s grab a coffee this time next year when MD&M is back in the Javits centre and if, by then, the 18-month-old device tax has killed the industry off completely; I’ll pick up the tab.
Gareth Pickering
Medical Plastics News
August 21, 2013