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VOL. 128 | NO. 206 | Tuesday, October 22, 2013

Smaller Manufacturers Feel Device Tax

By Michael Waddell

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Controversy continues to swirl around the new medical device excise tax that went into effect on Jan. 1.

The flat 2.3 percent tax is applied to every dollar of sales for medical device manufacturers, and for many small- to mid-sized companies the tax is crippling their ability to grow and invest much needed funds into other areas like research and development, sales and marketing, and hiring additional staff.

“It’s the ultimate in a regressive tax for a company at our stage,” said David Carlson, MRI Interventions Inc. chief financial officer. “We are still early in the commercialization of our product, and the tax is damaging because it does not take into account a company’s ability to pay. When we are trying to be frugal and use all of our resources to commercialize our product and ultimately get to profitability, it just slows us down and is very frustrating.”

The tax is expected to raise an estimated $30 billion over the next decade to support the implementation of the Affordable Care Act, but it has been cited by medical device manufacturers as one reason for recent layoffs, cuts in R&D expenditures and delayed expansion plans.

“It’s having a disproportionate impact on many medical device manufacturers, and they have not been happy because they have to absorb the cost,” said Kevin Morris, CPA at Dixon Hughes Goodman LLP. “The actual money is required to be submitted semi-monthly, and deposits are required to be made electronically.”

Primary concerns so far have been the cost of compliance and the hassle of trying to get the paperwork done every two weeks.

There had been recent talk of repealing the tax as part of the federal government shutdown negotiations, but those talks cooled.

“As far as repealing the medical device tax, I’m not sure it would have a significant impact on Obamacare as a whole but it would certainly be a victory for medical device manufacturers,” said Jay Oliphant, CPA at Dixon Hughes Goodman.

Beginning Oct. 1, companies will now be penalized for failing to make payments on time or for underpaying what they owe. There had been a nine-month grace period for the first three quarters of this year. In the first nine months of this year, it is estimated that the tax has already generated $1 billion.

Morris and Oliphant stress that the excise tax is tax-deductible, but the companies must be in the black to get that benefit.

“It’s having a disproportionate impact on many medical device manufacturers.”

–Kevin Morris
CPA, Dixon Hughes Goodman LLP

Smaller companies like MRI Interventions have been hit hardest by the tax.

MRI Interventions produces and sells its cutting-edge ClearPoint Neuro Intervention System imaging system used in minimally invasive surgical procedures on the brain, such as MRI-guided deep brain stimulation (DBS) surgery, focal laser ablation, and brain tissue biopsy. The ClearPoint system provides stable guidance for the placement and operation of instruments or devices during neurological procedures performed within MRI suites using MR imaging.

MRI’s ClearPoint system is now sold at 25 sites, and the company reported approximately $500,000 in product revenue for the second quarter of this year.

The medical device tax cuts into the company’s ability to invest in product enhancements or beef up sales and marketing efforts.

The logic behind the tax is that the Affordable Care Act will cover more patients and medical device companies will have more opportunities to sell their products.

Carlson pointed out that if a young company works hard and achieves a 10 percent profit, the tax wipes out nearly a quarter of it.

“That can be quite a wallop for a small company,” Carlson said.

Companies are currently required to make estimated tax payments twice each month.

“From an administrative standpoint it adds insult to injury because we have to take the time to calculate and pay the tax twice each month. It’s more of an administrative burden than an income tax, which might only have to be calculated quarterly,” Carlson said.

So the question comes up: why don’t medical device companies simply raise prices by 2.3 percent to cover the extra cost?

“Most hospitals would reject that notion, particularly hospitals that are part of a larger, more sophisticated organization,” Carlson said. “This is a manufacturer’s tax, and the intent behind it is that it be passed along to customers. We have price increases periodically, but we have not attempted to bill our customers for that tax.”

In fact, the hospital industry has created a website this year called “Medical Device Tax Watch,” and it is essentially a public shaming campaign that identifies any company that is passing the tax along to hospitals.

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