Medical device tax: At least $510M paid in 2013

UPDATED March 13, 2014, with comment from AdvaMed

The financial impact of the medical device tax appears to be much lower than originally feared, a MassDevice.com analysis shows, with the medtech industry paying at least $500 million on the 2.3% levy last year.

That’s a far cry from the $1 billion estimate industry lobbyists floated last summer, just 6 months after the tax went into effect as part of the Affordable Care Act. And it’s a drop in the bucket toward the $30 billion the tax is supposed to raise to help defray the cost of healthcare reform.

Editorial: The medical device tax is still a bad idea

Back in July 2013, a report released by a coalition of medical device lobbying groups estimated that the tax had cost the industry $1 billion, in roughly $97 million installments paid every 2 weeks. In March 2012, Moody’s Investor Services said the tax costs could top $650 million for the medtech companies it covers.

But even with the 1st year’s worth of the tax behind us, it’s hard to come up with a precise figure for the total industry spend on the tax. MassDevice.com asked the IRS several times for information on the medtech tax, to no avail.

So we turned to the SEC, scouring the regulatory filings of some 150 medical device companies. We found that many firms did not list the dollar amount paid out for the tax (or even mention it, or the Affordable Care Act). A few, such as diabetes device maker Dexcom Inc. (NSDQ:DXCM), said their products are exempt. Others, including Zimmer (NYSE:ZMH), said they’re carrying the tax as a cost of inventory until the inventory is sold. And IRS rules covering "constructive sales price" further complicate matters, as companies can cut nearly 29% off the retail price on devices sold to affiliated distributors when computing the tax base.

In the end, we identified 64 companies that provided either exact figures on their medtech tax tabs, or described it as a percentage of total sales. Those 64 companies paid a collective $509.4 million toward healthcare reform in 2013.

By the numbers

In terms of dollars spent, Stryker (NYSE:SYK) led the way at $81.2 million, followed by Boston Scientific (NYSE:BSX) at $73 million. Medtronic (NYSE:MDT) said it had paid $21 million on the tax as of April 26, 2013.

Only 14, or 9.7%, of the companies in our sample shelled out a collective $494.8 million – 97.1% of the total – last year:

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In some cases, the hit was well below companies’ internal predictions. Medtronic (NYSE:MDT), for example, last April estimated its annual medtech tax spend at $100 million to $150 million, but paid an estimated $63 million. C.R. Bard (NYSE:BCR) predicted a device tax tab of $40 million, but paid $29.4 million. Most companies, however, such as Intuitive Surgical (NSDQ:ISRG), Masimo (NSDQ:MASI) and Becton Dickinson & Co. (NYSE:BDX), were within their predicted ranges.

The tax took its biggest bite out of Masimo’s hide, in terms of percentage of total sales: The patient monitoring device company’s medical device tax payment last year amounted to 1.2% of revenues. Boston Scientific, Intuitive Surgical, NuVasive Inc. (NSDQ:NUVA) and Bard each paid the equivalent of 1.0% of their 2013 revenues. Covidien (NYSE:COV) (0.5%) and Medtronic (0.4%) brought in the low end of the range.

The medical device tax at a glance

The tax had a widely disparate effect on the bottom lines of the 14 companies. In the cases of Boston Scientific and Hologic (NSDQ:HOLX), which both posted net losses last year, the tax amounted to a significant portion of their reported red ink (60.% of BSX’s -$121 million net loss and 30.8% of Hologic’s nearly -$69 million loss).

The $6.9 million NuVasive paid was 86.7% of its 2013 profits. Masimo paid 10.8% of its net income; by contrast, Covidien’s bottom-line hit was only 2.5% and Medtronic’s just 1.7%:

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Wanda Moebius, senior vice president of public affairs for AdvaMed, offered the following rebuttal:

AdvaMed is concerned that readers might be left with a serious misunderstanding of the impact of the device tax after reading this story. To be clear, the true focus should be on the urgent need to repeal this onerous tax.

This story looked at SEC filings of 150 companies to determine how much has been paid toward the $1.8 billion in revenue the Joint Tax Committee estimated would be raised in by the tax in 2013. Only 64 of these companies actually reported the amount of tax they paid in their filing, and the payments reported by these companies totaled around $500 million. Based on the tax paid by this fraction of the industry, the article states that the "financial impact of the medical device tax appears to be much lower than originally feared." To assert that, because the tax paid by a fraction of the industry is less than was originally estimated as the tax to be paid by the whole industry, the impact "is lower than originally feared" makes no sense. The takeaway just as easily – and more accurately – could have been that just 68 companies paid $500 million last year.

The MassDevice listing of companies does not include many of the industry’s largest and medium-sized companies and doesn’t include ANY of the smaller companies – which make up the majority of the industry. There are entire sectors of the industry – imaging for instance – not represented in the tally. At last count, there were about 5,300 companies across the U.S. serving patients worldwide.

As a recent AdvaMed survey of the industry showed, the tax has already cost tens of thousands of jobs, resulted in substantial cuts in R&D, and harmed the industry in a number of other ways as well. The real-world impact has indeed been as bad or worse than originally feared.

Sincerely,

Wanda Moebius
AdvaMed