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As originally asked by Paul M. Stein.

I’ve been seeing all sorts of news about the excise tax recently, from Medtronic and Boston Scientific dropping their estimates of the hit by about 25%/year to it’s going to take years to be able to raise prices to make up for the tax.

Since the very beginning of the discussion a couple of years ago, I figured that it all might be a bit easier to deal with for many manufacturers. I got the following e-mail from Vacu-Med yesterday: “In accordance with new legislation, as of Jan 1, 2013 there will be a 2.3% excise tax added on all domestic medical device sales.”

Well, that was easy.

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Steve Levers
CEO and Co-founder at Cellsonics, Inc
There can be good reason for skepticism about placing the blame for layoffs on the med device tax. No doubt it may be one of many factors considered in these decisions. However, it pays to look closer at each company’s history. These companies restructure and adjust staffing globally on a regular basis. For instance, Medtronic has had layoffs perennially since 2007. Interestingly, the report in the link below shows revenues and operating profits typically increased in following periods.

[http://www.minnpost.com/medcity-news/2011/03/medtronic-layoffs-typically-followed-higher-revenues-next-quarter|leo://plh/http%3A*3*3www%2Eminnpost%2Ecom*3medcity-news*32011*303*3medtronic-layoffs-typically-followed-higher-revenues-next-quarter/nF1o?_t=tracking_disc]

Andy Carter
Chief Technology Officer at TheraCell, Inc
The BODs of many companies have used this as an excuse to make cuts in areas like R&D that are very sensitive to analyst opinion. For the CEOs they have the “Easy” button of being able to blame the government not themselves for the need / wish to cut costs. It is a sign of weak management to blame others. For well managed companies they should see this as a great opportunity. If your competitors are making themselves less competitive get in there and grab their market share – aim to pay 10% more medical device tax next year – from increased sales.

John Kingston
CEO at Henke Sass Wolf
As CEO of a medical device company I can assure everyone that this tax is no minor issue and will definately be paid for by shifting the costs down the line eventually to the consumer or taxpayer in one way or another. Otherwise internal cost cutting will happen and cutting people is the quickest and easiest way to do this in most cases. In my opinion this tax is highy destructive to many companies.
Just imagine you are a small 1 Million dollar company producing only taxable medical devices and making a pretax profit of 10%. So you made 100K pretax last year and this year you have to pay an additional $23,000 in excise tax. There are many small medical companies that can not absorb this kind of tax. For the large companies some of the tax can be taken but a majority will be pushed to thier vendors and customers. The rest will be compensated for by internal cuts and or cuts in future hiring. No matter what you opinion about where the money will come from, this policy will hurt the economy in general and certain companies severely.

Camilla Storaa
Project manager at Getinge
From the sideline: this debate reminds me of the Swedish proverb “What you lose at the swings you take back at the merry-go-round.” (i.e. a loss in one area of operations can be compensated by a gain in another.)

To me it seems pretty obvious that any increased cost (like in this case the tax) has to be compensated somehow, and there are two options: reducing other costs (like staff) or increasing revenue (i.e. push the cost on to the customer). How anybody would ever think there could be any other outcome is beyond me. 😉

So when HSCA in the link above says: “HSCA took no position on the medical device excise tax, other than expressing its concern that the device industry not be allowed to pass along the cost of the tax to hospitals.” To whom did the HSCA picture that the industry would pass on the cost instead?

I hope your government spends the 2.3% collected tax wisely, so what’s been lost on the swings will in fact come back at the merry-go-round.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Sorry, Bob, I couldn’t find it before I wrote above. That’s why I asked for the link. The 1,170 from Stryker was on the list to make up the 4,795. If all the biggest ones make up only 10% of the 50,000 number, then wouldn’t there need to be just massive percentages laid off from the medium and smaller fry? I haven’t heard about that anywhere, and as you can see from my comment a bit farther above, I’m keeping pretty close tabs on many sources.

Robert Bouts
Principal at Bob Bouts & Associates
Check out the Wall Street Journal, I’m in Michigan where Stryker is located & they let 1,100 people go & that’s just one company.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Bob, do you have a link for that 50,000? I’m suspicious as even AdvaMed projected a maximum of 30,000, and all of the numbers Suzanne provided, which were the largest and most well known, only add up to 4,795.

Robert Bouts
Principal at Bob Bouts & Associates
Interesting discussion, some views expressed haven’t changed much in spite of what has transpired in the last twelve months. In the past year 50,000 people lost their jobs in medical device companies (Wall Street Journal), and there will be more, look at the numbers & look at the tax.The 2.3% device tax is on GROSS REVENUE & NOT NET, it is the only tax in our county’s history that taxes gross revenue; some see that as a very small percentage, please look at the numbers. For example: let’s assume you are a small medical device company grossing one million dollars, expenses are $900,000, so your net income is $100,000.The corporate tax rate is 35% (highest corporate tax rate in the world) so 35% of $100,000 is $35,000, the device tax is 2.3% so 2.3% of one million is $23,000.
Corp Tax $35,000
Device Tax $23,000
$58,000 Total Tax Due
Effective tax rate on net revenue of $100,00 is now 58%, a tax increase of 23%, government now collects 60% & you keep 40%. A 23 % tax increase is massive, the largest tax increase in the history of this industry effective January first. Business executives had to deal with it immediately & they did so by eliminating tens of thousand of employees; they also are moving off shore.
This is a 20% tax increase which is negatively effecting the entire industry; referring to this as a small percentage, a dinky tax is very deceptive, extremely misleading and ignores the reality of a 20% tax hike, & that is the reality.
Apply the same 2.3% gross revenue tax to Ford, Chrysler, GM, & Kroger, they would all be bankrupt within the year. This is a destructive tax, poorly planned, poorly executed and implemented by people who are clueless.
Just found out the device tax also applies to fishing poles, fishing lures, bows, arrows,
quivers, & gas guzzling suv’s; I personally don’t use any of them but I thought you might want to know.
BB

Matt Tyler
Platform Architect at ResMed
The excise tax stands to cost our company an additional $500k per year. That means we don’t have room to hire, say, five additional employees. It’s not enough to just not lay anyone off. The tax is senseless and the law does not lead to providing more medical care.

Jac Higgins, CHFP
President and Principal Advisor at Surgical Supply Advisors, LLC / S2A
Jamie, you’re correct, of course. No one likes to see costs go up, especially not as the result of increased taxes, but all this “the sky is falling” nonsense is an overblown response. We need to get over ourselves and move on.

Jamie Green, MBA, CMRP
System Director, Strategic Sourcing – Clinical/New Product Introduction at Baylor Scott & White Health
Interesting discussion and many good points. All these major companies mentioned have revenues in the billions annually and there are many customers of theirs that are out there paying list price for their products. It’s sad for anyone to lose their job, but to attribute it to the device tax is just absurd. Obviously, it’s the easy way of explaining employee layoffs and some maybe true to a certain extent, but as Paul stated, their senior leadership should really come together and look at their inner workings, make the right decisions that will benefit the overall company and not just their pockets.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Suzanne, I’ve followed this story very closely for the past two years on LinkedIn, Qmed, MD+DI Newsletter Online, Fierce Medical Devices, and a few others, and, believe it or not, none of your references is new to me. Yes, certainly some directly attribute their actions to the tax, but the internal strategic workings of many of these companies put them at severe risk for this particular relatively tiny hit. Failures of leadership such as dropping most of their internal R&D in favor of purchasing hyper-pricey, poorly performing acquisitions and failing to maintain their high quality systems led to almost no new products and the old ones undergoing recalls. A dinky 2.3% should not have caused such wholesale wreckage to an industry…and it didn’t. I’ve spent 22 years inside these companies, and I have seen first hand how they forgot everything that got them to their pinnacles. The tax is only an additional straw that landed on an osteoporosis ridden back. Certainly many of the current “leadership” scream, cry, and point fingers for what the tax is doing, but when they do, they should really be looking straight at themselves in the mirror when they do the pointing.

Suzanne Abate Gunter MBA, RN, CPC
Program Manager, Inpatient Services at Fresenius Kidney Care
A few references for you Paul. Erin McBride wrote an article in November titled: Medical Device Manufacturers to Lay Off Thousands of Employees. The article mentions a few of those that I mentioned:

In August 2012 St Jude Medical Center cut 300 employees in order to save approximately $50 to $60 million in anticipation of the excise tax.

Stryker will cut 1,170 jobs, or 5% of their global workforce, in anticipation of the excise tax.

Due to lower quarterly report in addition to its stock being down late last year Boston Scientific had announced it was laying off 1,200 to 1,400 jobs in the U.S., while shipping investments and jobs to China. They commented that the excise tax is a contributing factor.

“Medtronic laid off 500 employees, with plans to cut another 500 in 2013. Medtronic employs roughly 38,000 people worldwide. The company reported gross revenue of $16.2 billion in April 2012, which will result in a $372.6 million excise tax”.

In addition, Fierce Medical Devices posted an article titled: The 10 Largest Medical Device Layoffs of 2012. To name a few that specifically name the device tax as the reason for layoffs:

Welch Allyn
Layoffs: 275
Reason: The privately held device maker cites the “onerous” device tax in its move to reduce its workforce by 10%, a plan coupled with moving some of its units overseas

Zimmer
Layoffs: 450
Reason: Zimmer blames the device tax for its in-progress staff slashing, looking to offset what the company says will be a $60 million annual charge.

Hill-Rom
Layoffs: 200
Reason: Hill-Rom is cutting 3% of its workforce, placing the blame on “ongoing economic conditions” and the impending 2.3% tax.

There are countless more articles and news posts throughout the web that I could provide that clearly demonstrate that the device tax is a primary reason or main contributing factor in the recent layoffs in the medical device industry. May not seem like a lot in the overall scheme of things but its huge to these individual companies and their employees who are left to maintain productivity and innovation.

Ernie Manriquez
VP Sales and Marketing Juell machine Company
Many of the companies Suzanne mentions have already begun these “Massive layoffs” If its 5% or 10% this is nothing to take lightly. We might be talking over 5000 jobs. This and the fact that many companies who say they are thinking of moving manufacturing already have. Once again eroding the US economy. I have to disagree that most of these companies are pretty much going on record stating layoffs directly due to taxes. This is not the age of the innocent.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Suzanne, that 10% figure is way overblown. In addition, in your list, only Stryker specifically stated last year that their preemptive layoffs were due to the tax. Indeed, several companies have specifically gone out of their way to state that their cuts were not due to the tax. Most were likely due to internal corporate strategic issues that have come to light in well-publicized quarterly statements, and the same thing goes for the moving of manufacturing jobs overseas to try to cut costs. Yes, thousands of jobs have been affected, but most of which were done long before the tax went into effect. Poorly timed correlation does not equal causation, although many very vocal industry people and industry mouthpiece groups wish everyone to believe the opposite.

Suzanne Abate Gunter MBA, RN, CPC
Program Manager, Inpatient Services at Fresenius Kidney Care
Many medical device manufacturers have chosen to fund the device tax with massive layoffs. Stryker, Abbott Laboratories, Boston Scientific, St. Jude Medical, Covidien, to ONLY name a few laid off approximately 10% of their workforce. In addition many are moving their manufacturing OUS. This has affected thousands of jobs.

Is there any compromise in the Patient Protection and Affordable Care Act? Certainly seems as though its the same organizations that continue to thrive as others struggle to stay afloat.

Heather Thompson
Creating B-to-B content for medical device and digital health publications.
Truthfully, I’m sure it’s already happening. But we probably won’t see a site dedicated shaming hospitals that are passing the cost on to insurers/patients.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
I was unaware of the site, but am now impressed how many others have clicked that particular button. It seems that everyone is crying about 2.3% now, manufacturers and buyers, depending on who gets stuck with finally paying for it. My solution to cut the tears would be for the members of the HSCA to push the cost out one more step. This should be easy. Anyone seeing a hospital bill notes the huge mark-ups they have. Because the public opinion of them is pretty low already, I doubt if they will garner much support for their efforts.

Heather Thompson
Creating B-to-B content for medical device and digital health publications.
Paul,

I’m working on a story about HSCA, which names firms doing exactly what Vacu-Med is doing on a web site, and asks them to cease.

[http://www.devicetaxwatch.com/2013/02/welcome-to-medical-device-tax-watch.html|leo://plh/http%3A*3*3www%2Edevicetaxwatch%2Ecom*32013*302*3welcome-to-medical-device-tax-watch%2Ehtml/Btzt?_t=tracking_disc]

This is serious. It really is unclear how firms can and cannot pay for the tax, but this kind of site could damage public opinion. Thoughts?