Fighting Fire with Fire – the Medical Device Tax and Outsourcing

| Printer friendly version

Since its passage as part of the Affordable Care Act in 2010, the medical device tax has been hotly debated.  The 2.3% excise levied on total revenues may effectively preclude new entrants while hindering the growth of established companies.  While industries have turned to outsourcing for a number of years as a way to cut costs, the medical device industry may increasingly consider outsourcing in the coming years as a means to offset the effects of this tax.  While outsourcing may help U.S. medical device companies, it may adversely affect Americans currently working in this sector.

Henry Miller expressed his concerns last week in Forbes that the medical device tax will have a detrimental effect on the U.S. medical device industry.  Since the tax took effect on January 1, Miller notes that device manufacturers have been required to pay more than $1 billion on gross sales – not profits.  As an example, Miller posits, “imagine that you’re a manufacturer of medical devices and had a profit of $100,000 on sales of $1 million after all your costs and expenses—everything from materials and labor to research.  The excise tax would be $23,000, wiping out almost a quarter of your profits.”

Adding to his concern is the fact that “it can take from $70 million to $100 million in total sales before these businesses make their first cent of profits.  Nevertheless, they would have to pay the excise tax on their revenues.”  This is significant for the U.S. medical device industry, of which “80% of its companies have 50 or fewer employees.”

While the medical device tax may in fact harm the U.S. medical device industry, foreign countries have provided a welcome source of relief – outsourcing.  Companies are increasingly turning to outsourcing as a way to cut costs.  In fact, over the last several years, device manufacturers including Baxter, Johnson & Johnson, Stryker, Medtronic, and Boston Scientific have launched outsourcing projects for manufacturing, IT services, payroll processes, application development, and finance and accounting.  These projects have been launched in Sweden, Canada, China, Eastern Europe and India.

Although the House and the Senate have separately voted to repeal the medical device tax, medical device manufacturers should not expect relief from this provision anytime soon.  In order to abolish the tax, loss of potential revenues from the tax – which have been estimated to total $10 billion to $29 billion over the next ten years – would have to be completely offset by alternative revenues.  Rather, to offset the effects of the medical device tax, U.S. manufacturers may increasingly look to options such as outsourcing as a way to reduce costs and increase profits.  Ironically, as companies increasingly turn to outsourcing to offset costs of the medical device tax, the 400,000 Americans directly employed by the medical device sector and the 2 million more that supply and support that workforce stand to suffer – a result surely not envisioned by Congress.

How has your company been affected by the medical device tax?  In addition to outsourcing, what types of options has it considered to reduce costs?  Please respond in the comment section below.

Leave a Reply

By using this blog, you agree and understand that no information is being provided in the context of any attorney-client relationship. You further agree and understand that nothing herein is intended to be legal advice. This blog is solely informational in nature, and is not intended as, and should not be used as, a substitute for competent legal advice from a retained and licensed attorney in your state. Knobbe Martens LLP makes no representations or warranties as to the accuracy, completeness, timeliness or availability of the information in this blog. Knobbe Martens LLP will not be liable for any injury or damages relating to your use of, or access to, any such information. Knobbe Martens LLP undertakes no obligation to correct or update information on this blog, which may be incorrect or become incorrect or out of date over time. Knobbe Martens LLP reserves the right to alter or delete content or information on the blog at any time. This blog contains links and references to other websites and publications that you may find of interest. Knobbe Martens LLP does not control, promote, endorse or otherwise have any affiliation with any other websites or publications unless those websites or publications expressly state such an affiliation. Knobbe Martens LLP further has no responsibility for, and makes no representations regarding, the content, accuracy or any other aspect of the information in such websites or publications.