The Medical Device Excise Tax: Another Barrier to Innovation

November 28, 2012

The Affordable Care Act (ACA) was passed in 2010 and imposes several tax increases totaling approximately $800 billion over the next 10 years. A 2.3 percent excise tax will be imposed upon medical device manufacturers. This excise tax, which is set to be implemented in January 2013, will be applied to annual revenue and will be assessed on medical devices sold in the United States, including those that are imported, says Thomas A. Hemphill, an economic and regulatory expert with the American Action Forum.

  • The medical device industry is highly competitive and has hundreds of firms in the market, with 95 percent of them reporting sales revenues less than $100 million.
  • Ninety-eight percent of companies employ less than 500 workers and 80 percent of companies employ fewer than 50 employees.
  • The United States is considered to be the leader of the medical device industry, housing 32 of the 46 medical device companies that report $1 billion or more in annual sales.

U.S. medical device companies have an edge in the status quo but that could slip as the excise tax reduces profits for many of these companies.

  • One study found that net profits could be reduced anywhere between 6.8 percent and 40 percent.
  • According to one survey, 42 percent of venture capital firms planned to make fewer medical device investments.
  • Venture capital funding for the medical devices industry dropped to 10 percent of total funding dollars in the second quarter of 2012, a 2 percent decline from the first quarter.

The tax is going to be harmful to companies across the board. Small- and medium-sized companies will be especially hard hit considering that it will be difficult for them to attract the necessary funding from venture capitalists to fund their projects. Similarly, these companies are going to have a difficult time since companies that innovate typically suffer losses in the first years when they are researching and developing.

Source: Thomas A. Hemphill, "The Medical Device Excise Tax: Another Barrier to Innovation," American Action Forum, November 13, 2012.

 

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