Tuesday, November 20, 2012

How the medical device tax hurts innovation

Three CEOs in my own industry decry the new tax on medical devices, one of the funding mechanisms for the Affordable Care Act. Because of the tax's structure, it amounts to a 30% federal tax increase on the industry. For my own company, the new tax essentially wipes out a year of earnings growth. Since that is not an acceptable answer for stockholders (who can always invest their money in some other industry), companies have reacted to the tax by cutting other expenses, which in our industry usually means employees. Surging regulation on the part of the United States government (from all corners) means that it is very difficult for most device companies to cut "general and administrative" expenses and cost of goods sold. That means that compensating savings will have to come from sales and marketing expense (challenging, because if revenues suffer then even more cuts are necessary) and product development. That is happening anyway, because governments all around the world have tremendously extended approval times for new medical technology that they fear will cost more and strain their budgets further, but the medical device tax will surely accelerate the decline.

The other consequence of the medical device tax is that it further shifts the competitive balance from small companies to multinationals. First, it is a tax on revenues, not profits, so its impact on a money-losing start-up is onerous. More small companies will fail because of the tax, and fewer new device companies will receive funding in the first place. We will have fewer great products in our dotage as a result.

Second, the tax is imposed only on sales in the United States, so big companies that typically do half or more of their business in the rest of the world will pay a substantially lower tax (as a proportion of their revenues) than small companies.

Unfortunately, it is often the small companies that do the best inventing.

Hammering the medical technology industry is bad policy, because in addition to helping hundreds of millions of patients around the world lead longer and more comfortable lives, our device companies have been one of the real success stories in the American economy. Both the industry's prosperity and our own well-being require innovation, which politicians the world over seem to take for granted. That is a mistake.


  1. Anon Attorney here to support the new blog, TH.

    I believe I have previously disclosed that I am peripherally involved with some medical tech startup and early stage companies, both as a capital investor and as an advisor.

    I can pretty safely report that Obamacare has all but killed fundraising for small and startup med tech companies, at least for the time being. There is simply too much regulatory and revenue stream risk inherent in Obamacare. Investors won't touch it now, and I don't blame them.

    There is funding available on the software side of the business for companies involved in records management and other efficiency-driving products and services. However, I think the days of gritty start-ups driving technical advances are probably over.

    Lots of money out there for social media ventures and gaming apps. So on the upside Americans can continue to play Angry Birds and Farmville on Facebook as they waste away on their deathbed from a preventable disease.

  2. Yeah, that is exactly what I hear. The number of venture-backed companies that cannot fund their next round is astronomical, and a lot of them are up for sale when they would not have been a few years back. It is a national tragedy.

  3. How did this tax happen? I have heard rumors that the med device industry refused to fall into line with the other health care industries that supported the ACA, and that the Administration punished it.

    Since the US has turned into Chicago on a grand scale, I find these rumors credible. Can anyone confirm or deny?

  4. James, there is something to that version. The inside baseball was not pretty for those of us with a romantic view of our democracy. Pharma caved and agree to pay a higher tax, and the Democrats expected the device industry to do the same. The device industry group resisted because the analogy to pharmaceuticals is a false one: Drugs are paid for separately, devices are just another input to a hospital's expenses, like rent, building maintenance, salaries and wages, and liability insurance. As a result, the device industry is already cutting prices to respond to cost-cutting pressure from hospitals. That dynamic does not apply to drugs.

  5. I guess I do have to wonder how taxing medical care can lower the cost? Eventually, some margin will be added to the tax and handed back to the consumer. Those on the lowest end of the scale hand it back to the taxpayer. It is the margin which is added at every step which will eventually hurt smaller companies and patients.


Web Statistics