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A Taxing Proposition for Medical Manufacturers

Fri, 06/25/2010 - 6:56am
by Kim Ukura, Associate Editor, PD&D

Although the health care reform bill was signed months ago, everyone seems to still be riffling through the pages trying to figure out what it means and where it’s probably gone wrong.

Earlier this month the AP reported that medical device manufacturers are “bristling” over a stipulation in the health care law that would add a tax of 2.3 percent on total sales — not profits — of companies that supply these devices.

Justification for the tax is this: the health care bill will expand the marketplace by 32 million people who will now be able to buy these products; therefore, device manufacturers can afford to pay more in taxes and therefore should.

“This is going to work out just fine,” says Sen. John Kerry, adding that the tax won’t strip away the profit or ability to do business from these companies.

As a semi-amusing side note, medical device manufacturers aren’t the only people getting dinged with health care law taxes — brand name pharmaceuticals, health insurance providers and people who like to go indoor tanning all take a hit too. I want to know who argued for the tanning tax — really?

Anyway, something is missing in the argument for the device manufacturers tax. I don’t see a clear logical link from the statement “We’re getting you more customers” to the idea that a company should pay more money in exchange for those potential patients.

The 32 million people we’re talking about aren’t guaranteed consumers for these products; the assumption that they’ll bring in enough money to offset a required tax on all companies is an awfully big one.

But what I really wonder is whether an additional tax on a company’s total sales will actually impede the research and development of new products or hurt job prospects like and many device trade groups suggest it will?

Big device companies have the pocket change to spare. For example, Medtronic spent about $1.07 million lobbying Congress during the first quarter of this year.

Business Week reported that their efforts focused both on the health care bill and on efforts to make it easier for patients to sue medical device companies in personal injury lawsuits.

How about we cut back lobbying and put that money into R&D — problem solved?

Not really. Medtronic is a huge corporation — the world’s largest in its niche — that often makes its profit margin with room to spare. Other companies, particularly smaller device manufacturers and suppliers, may not have the same luxury.

R&D isn’t the only thing threatened by this tax. Opponents like the Medical Device Manufacturers Association say it will also prohibit companies from forming new jobs or even force them to layoff workers. This is too bad, given that in many places medical manufacturing is holding the economy together.

In Michigan, where the turmoil in auto manufacturing has left many people jobless and companies in trouble, new plants are being opened or adapted to build medical device parts.

Statistics provided by the Michigan Manufacturing Technology Center to Crain's Detroit Business indicate that between 1996 and 2009, the number of nationwide employees in medical manufacturing rose from 301,000 to 308,000, while the overall manufacturing dropped from 17 million jobs to just 11 million over the same timeframe. 

Medical manufacturing is growing slowly — but growing — and I imagine this additional tax could threaten that growth for smaller companies or companies just getting into the industry.

While it’s too early to say for sure what the impacts might be, I can’t help but think the government made a mistake with this decision and, in an effort to try and pay for health care reform, put a tax on medical device manufacturers that will do more tangible harm than potential good.

For a different perspective on this issue, I’d also suggest this piece by healthcare executive Edward Berger, published in Medical Design Technology.

Worried about how the medical device tax will impact your job or company? Have ideas about what might happen? Share your thoughts, predictions with me at kim.ukura@advantagemedia.com

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