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Jobs, R&D Cuts are Likely Steps to Deal with Device Tax Survey of MedTech Execs Shows Anticipated Impact of Impending Medical Excise Tax

Survey of MedTech Execs Shows Anticipated Impact of Impending Medical Excise Tax

BOSTON, MASS. – March 14, 2012 – Job cuts and slashing of R&D budgets are two of the likely options the state’s medical device companies will take to address the impending tax on their products, according to a new survey of senior executives of the firms.

The Massachusetts Medical Device Industry Council (MassMEDIC) conducted a survey last month among medical technology manufacturing companies in the region to gauge their plans and readiness for the coming Medical Device Excise Tax (MDET) and its impact on company operations.

The MDET, which goes into effect January 1, 2013 and raises $20B over a 10-year period, was established to help finance the Affordable Care Act that was signed into law in March of 2010. The amount is based on a 2.3 percent excise tax that will be levied on the sale of most medical devices, regardless of whether a company generates a profit.

“We warned two years ago that medical device companies would be forced to deal with this tax by preparing for job cuts and reductions in R&D spending,” said Tom Sommer, President of MassMEDIC. “The U.S. leads the world in developing and manufacturing medical products, it doesn’t make sense that on one hand the government is promoting exports and manufacturing jobs, while on the other hand it is implementing policies that will cut jobs in this sector and harm its competitive advantage – the development of innovative medical technologies.”

Forty-two senior executives of medical device manufacturers were surveyed by MassMEDIC. Key findings of the survey include:

  • As of February 2012, 10 months before the tax goes into effect, only 25 percent of responding companies have put systems into place to comply with the MDET.
  • 44 percent of respondents stated that their companies would pass the cost of the new tax on to end users such as hospitals, clinics, purchasing organizations and doctors. This would result in higher costs for medical devices sold in this country.
  • 39 percent of respondents stated that their companies would assume the cost of the MDET, implementing internal cost reductions to meet revenue losses, taking the following actions:
    • 50 percent will cut R&D operations
    • 25 percent will implement workforce reductions
    • 25 percentwill outsource manufacturing to lower cost areas

The survey also found that 49 percent of respondents said that the MDET would have a ‘significant impact’ on their company’s operations, while 75 percent said it would ‘have an impact.’

Proponents of the health care reform law argued that medical device companies will experience a jump in revenue as a result of millions of newly insured citizens. Industry representatives at the time said that the overwhelming number of devices used by patients is already covered by private insurance plans or through Medicare.

In Massachusetts, the state’s universal health care law has been in effect for six years. With nearly 100 percent of the population now covered by health insurance plans, the KPMG survey participants were asked if their companies had experienced an increase in unit sales in Massachusetts since 2006. None of the respondents reported an increase in unit sales in that time period.

The US Department of Treasury will be responsible for collecting and administering the MDET. The department issued proposed regulations on the collection of the tax earlier this year. No timetable has been set for the release of final regulations.

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About MassMEDIC:

The Massachusetts Medical Device Industry Council, an organization of nearly 400 manufacturers, suppliers, research institutions, and academic health centers, promotes the unique interests of the Bay State’s growing and vibrant medical device sector. Through a variety of programs, informational seminars, advocacy campaigns and other projects, MassMEDIC provides medical device manufacturers and suppliers with information on industry trends and regulatory policies, and creates forums that allow members to exchange ideas and information on issues affecting the industry. For more information on MassMEDIC, please contact us at (617) 414-1340, or visit our web site at www.massmedic.com.