The CEO of one of the largest medical device makers in the world says the impending medical device tax, a 2.3% levy on all U.S. sales, leaves the med-tech industry with 2 stark choices: Raise prices or lower costs.
"This is one of the best industries we have. I’m a big medical device believer. This is the place where we create jobs. We’re creating jobs, we’re hiring people," Rusckowski told MassDevice.com. "We only have 2 ways to deal with this: Raise prices or lower costs. Lower costs mean less employment. It’s that simple.
"We’re not going to drop earnings and therefore we only have a few alternatives. One is we have to compensate for it somehow through pricing. Sending price increases back to the marketplace is not good for health care costs. Second is no longer investing in new engineers, new manufacturing facilities," Rusckowski said. "You’re shooting yourself in the shoes – 1, as a good industry, and number 2, you’re penalizing a business that’s a solution to the health care cost and quality problems."
Philips Healthcare, which ranked 7th on the MassDevice Big 100 list of the world’s largest med-tech players, employs about 35,500 people worldwide. A MassDevice.com analysis shows that the firm could be in line to fork over as much as $123 million for the tax when it’s implemented in 2013.
Although he declined to reveal Philips Healthcare’s internal calculus of the tax impact and wouldn’t reveal how the company plans to deal with the hit, Rusckowski told us that the levy will definitely influence operations.
"I won’t give you a public statement on what we’re going to do about it. We’re thinking about how we should deal with it, but it will affect how we invest," he told us. "There’s only so much we can pass along and we have to absorb it, therefore it’s going to live in what we make as investments."
For companies like Philips, which posted nearly $30 billion in sales last year, absorbing the tax will be less of an issue than for the smaller firms that make up the vast majority of the U.S. medical device sector, Rusckowski noted.
"It’s not good for the industry. There are thousands of promising med-tech companies, it’s a long cycle-time from idea to commercial reality to profitability," he explained. " So if you’re running a $100 million business or a $50 million business, that’s real money. That’s not good."
Despite the profound impact the tax is likely to have, it’s received scant attention, Rusckowski added.
"If you take apart the Affordable Care Act and the funding mechanisms for it, there’s a lot of discussion about the new benefits, but very little discussion about the costs. Very few people realize we’re going to pay 2.3% of our U.S. sales," he said. "I’m shocked at how little visibility this issue gets. When it comes to the price, there’s been very little disclosure and awareness about the costs associated with it and the consequences of it."