Medical device tax more likely to raise prices than lower headcounts, survey says

MassDevice.com coverage of the medical device tax

Medical device makers are considering a few alternatives to deal with the impact of the new 2.3% medical device sales tax, with far more planning increases in product prices than expecting workforce reductions, according to a recent survey.

More than 40% of medtech companies surveyed said they plan to pass along either part or all of the cost of the tax to their customers and more than 30% said they were working on ways to lower production costs without resorting to layoffs. The results may be marred, however, by the 31% of respondents who either checked "other" or said that they were unable to disclose their plans.

The survey, conducted by Emergo Group, queried more than 3,000 medical device industry participants, isolating the medtech tax question to about 650 senior executives at companies in North and South America, most of them in the U.S. and Canada.

About 12% of those participants, who were able to select multiple options for how they would deal with the medical device tax, said they would trim research & development budgets and 11% said they would reduce their staff.

A little more than 1% said they would exit the U.S. market entirely.

Large companies, defined as those with 250 or more employees, were more likely to resort to layoffs, with nearly 13% reporting that they might lower headcounts. Only 10.4% of companies with 50-249 employees, 7% of companies with 10-49 employees and 5.5% of companies with fewer than 10 employees said they would do the same.

The large companies were also the least likely to hike prices, with 28.4% saying they would pass the tax on to customers. That compared with 34.9% of companies with 50-249 employees, 31.1% of companies with 10-49 employees and 34.1% of companies with fewer than 10 employees.

Industry lobbying groups have warned that about 43,000 medtech jobs may be lost as a result of the 2.3% medical device excise tax that took effect at the start of 2013.

Medical device tax opponents have long warned that the new levy on the industry, designed to generate federal revenue in support of President Barack Obama’s healthcare reform bill, would raise the cost of healthcare and force companies to lay off workers or put off hiring.

Some medical device purchasing groups have come out in protest of price increases, depicting the hikes as the medical device industry’s attempt to shift their fair share of the cost of healthcare reform to industries that are already paying their share.

GPOs have been wary of tax-related price hikes long before the tax took effect at the start of this year. In May 2012 GPO Premier urged the IRS to protect hospitals from price hikes by requiring device makers to promise that their tax burden isn’t baked into their prices.

The effort is not in vain, as a handful of older industry surveys have similarly found that medical device companies are looking for various ways to offset the cost of the medical device tax, including by raising prices for their products. A GPO protest, however, packs quite a punch. About 96%-98% of hospitals use some form of group purchasing and ¾ of hospital purchases are made through GPOs, according to HSCA.

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