Small Device Companies May Bear Biggest Brunt of Controversial Tax

Large companies making medical devices such as artificial knees are pushing for repeal of the controversial medical device tax attached to the health care law, but the tax’s repercussions may be more damaging in the short run to smaller, less vocal firms.

“It has a disproportionate burden on smaller device manufacturers,” said Kyle Pomerleau, an economist at the Tax Foundation, a Washington-based tax policy think tank.

Small manufacturers spend a higher proportion of their budgets on research and development and could suffer financially, according to Pomerleau, because they often do not turn a high profit starting out. “Smaller companies are ones with bigger expenses compared to revenue,” he said.

The 2.3% excise tax, which went into effect in January, will generate an estimated $30 billion over the next decade to fund the new health law. It taxes the sale of U.S.-sold medical devices, such as prosthetic joint replacements and heart defibrillators, but excludes consumer products like eyeglasses and thermometers.

According to data from the Advanced Medical Technology Association, 73% of device companies are small businesses with fewer than 20 employees. In 2010, U.S. spending on medical devices totaled $156.3 billion, or 6% of total national health expenditures. The figure has risen slowly but steadily since 1989.

Data obtained from revealed that Johnson & Johnson JNJ -0.21% , Stryker SYK -0.09% , Boston Scientific BSX +0.59% , Covidien COV -0.15% and Baxter BAX -0.17% , some of the largest medical device companies, have spent almost $20 million combined over the past two years lobbying Congress for the repeal of the tax. Last month those companies and several hundred others co-signed a letter House and Senate leaders urging a repeal.

Jeremy Feffer, an analyst at Cantor Fitzgerald, said larger companies, with their lobbying clout, will not feel the effects of the tax for another year or so. Feffer covers Stryker, a company that he estimates will pay about $25 million per quarter for the tax.

“Taking 2.3% off [smaller companies’] top line—some which just became profitable or broke even— will put them in the red,” said Brad Perriello, executive editor of Mass Device, a trade publication focusing on the medical device industry.

Feffer said for “smaller companies, it’s the difference between being profitable or not.”

Proponents of the tax say it will eventually be offset by an increased demand for medical devices as a consequence of coverage offered by the Affordable Care Act.

“The medical device industry has benefited enormously from public health insurance programs dating back to 1965,” said John Holahan, a fellow at the Urban Institute’s Health Policy Center. Holahan said that health policies such as the Affordable Care Act – and historically Medicare and Medicaid – have given the industry incentive to innovate and develop new technology.

“It wouldn’t have happened without growth of public programs, and they will continue to grow with Obamacare,” Holahan said.

The Democrat-controlled Senate rejected a House proposal to repeal the tax on September 30, before the government shutdown.


Josh Sandberg

Josh Sandberg is the President of Ortho Spine Partners and Partner for The De Angelis Group. He also serves as Co-Founder and Editor of OrthoSpineNews.

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