Medical device industry facing tough road ahead
| October 10, 2013
The business climate in 2013 and beyond will prove to be a challenging one for medical device manufacturers. And with the current government shutdown centering around the Affordable Care Act, one of the sticking points for passage of the funding bill is removing the steep excise tax on medical devices from the equation by delaying funding for the ACA for at least a year.
For starters, medical device user fees — the amount medical device manufacturers (MDMs) pay to file any type of application — have been increased. And both the FDA and the European Union have enacted legislation requiring a unique device identifier (UDI) for all medical devices. This UDI system has the potential to improve the quality of information for medical device adverse event reports worldwide, but at a cost.
A UDI is a unique numeric or alphanumeric code that includes a device identifier specific to a device model, and a production identifier that includes the current production information for that specific device, such as the lot or batch number, serial number and/or expiration date.
The excise tax imposed on manufacturers of medical devices will have the biggest impact. Effective since the beginning of 2013, this tax already taken its toll on some manufacturers. When the Supreme Court upheld the Affordable Care Act, the medical device excise tax was targeted to fund the law.
In a note to investors in June, a JP Morgan stock analyst reported that few companies will be able to pass all or even a portion of the tax on to hospitals or distributors, so a number of companies have started to put cost-cutting plans in place.
Larger companies, such as Medtronic and Stryker, expect the tax could cost them $130 million to $150 million just in 2013. For Stryker, that could represent one-third of its R&D budget. The company said it would rather use the money for creating jobs and new medical technology for patients.
For both large and small companies, planned layoffs are attributed to the tax. Because the tax is on total sales rather than profits, companies with the smallest margins will face the deepest impact.
Thomas Novelli, vice president of government affairs for the Medical Device Manufacturers Association said that the notion of penalizing medical-device manufacturers with a new tax on life-saving or life-improving devices, doesn't make sense because "normally, taxes are for something you want to use less of, like cigarettes or gasoline."
There are still many questions surrounding this excise tax. A Life Sciences Update by Grant Thornton International summarizes some of the questions regarding this new tax, such as which devices are subject to the tax, how the tax will be computed, and which devices are included in the safe harbor for retail exception.
Guidance from the IRS has been limited so far, and some of these questions and answers may change as additional guidance becomes available.
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