Under the provisions of the Patient Protection and Affordable Care Act (aka Obamacare) U.S. medical manufacturers will begin paying a 2.3% excise tax on virtually all products sold as of January 1, 2013.
What does this mean for the average healthcare consumer?
Most industry analysts believe that this tax will have an adverse effect on technological innovation, patient care, sector employment and — ironically — healthcare costs.
Although most medical manufacturers have indicated that they will absorb the impact of this tax largely through staff reductions, they readily admit that some costs will be directly passed on to hospitals, doctors, insurance companies, and, ultimately, patients.
But more troubling is what this tax could mean for the steady advance of technological innovation, which has been the hallmark of the American medical device industry throughout its history. While we often hear about medical technology driving up the cost of healthcare, the facts totally refute that argument. The use of medical technology significantly reduces the length of hospital stays and returns patients to their productive — and taxpaying — lives much faster than the methods and procedures that they have replaced.
Many procedures that formerly required a week's stay in the hospital are now completed with patient discharge in just a few days or so... or less... and often at lower-cost outpatient facilities. Whether receiving drug-releasing cardiac stents to eliminate an artery blockage, the latest breakthrough in knee, hip or other joint replacement, or advanced diagnostic techniques that can isolate and identify the cause of the presenting problem and set the therapeutic regimen much faster than previously, medical technology not only saves lives, but reduces overall costs, too.
The use of medical technology is not a significant factor in the cost of healthcare. In 2009, medical device expenditures in the United States totaled $147 billion — just 5.9% of the $2.5 trillion spent on the delivery of healthcare services.
Although industry reports typically cite the presence of 6,000 medical device manufacturing companies in the United States, the actual figure is more than double that number. The American medical manufacturing industry holds a 45-50% share of all products sold worldwide... and is one of the few remaining U.S. industries with a favorable balance of trade which means that we export more medical devices, equipment, systems and supplies than we import.
The U.S. medtech industry plows back 12% of revenues into product research and development — a rate of R&D four times greater than other manufacturing sectors.
With industry employment at around 400,000, AdvaMed, the industry's trade group based in Washington, estimates that this tax will result in the loss of up to 43,000 jobs as companies attempt to offset the $20 billion annual tax bill associated with Obamacare. These are relatively high paying jobs that will not be easy to replace.
The U.S. medtech industry is somewhat "bipolar" in that it includes such industry giants as Johnson & Johnson, General Electric, Medtronic, Abbott Labs, Boston Scientific and many others as well as legions of midsize and smaller firms that are the laboratories of innovation. Typically, these smaller firms face a myriad of pressures and often struggle for years before turning a profit. Yet, this tax will be imposed on gross revenues — irrespective of whether or not the medical device company was able to generate a profit.
Although medtech companies or hospitals that import foreign made devices will be subject to the tax, many industry watchdogs believe that this will be another incentive to move more medical device manufacturing off-shore.
Medical device manufacturing is not an industry for the faint of heart. Regulations can become unduly onerous and seemingly arbitrary at times while failure to gain reimbursement approval from the government can doom a product's market entry and eventual success in the private sector. As such, access to medical innovations can be denied to American healthcare consumers, yet be readily available in Canada, Japan, the entire European Union, and many other markets worldwide.
Medical device manufacturers have dealt with these and a litany of other frustrations for years in bringing life-saving and life-enhancing products from concept to commercialization. We're on the cusp of a whole new generation of personalized healthcare technology that shows significant promise in identifying diseases at the molecular level before any symptoms appear. Yet, the device tax could prove to be a disincentive for this and other new product research and development initiatives going forward.
The House has voted to repeal the medical device tax (HR 436), but a similar bill in the Senate (S 17), will require 60 affirmative votes for passage, which appears unlikely at this point.
Art Kerley is president of The Fairfield Factor, Inc., a marketing counsel and communications consultancy specializing in high-technology and advanced manufacturing industries. Medical technology and other precision-sensitive sectors are a particular focus.