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Researchers say device tax hurt investment in research and development

by Thomas Dworetzky , Contributing Reporter
A new Iowa State University study looking at data from 2006 and 2015 shows that firms have cut R&D thanks to the the Affordable Care Act's medical device tax.

"Highly advanced equipment in hospitals is a critical aspect of medical care," said Daeyong Lee, an assistant professor of human development and family studies at ISU. "Some devices, such as coronary stents, require high research investment. If medical device firms stop or reduce that investment, we won't have better equipment and devices for complicated surgeries or procedures."

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His study, which is appearing in the journal Research Policy, looked at the 2.3 percent excise tax imposed on medical devices in 2013.

“The medical device tax significantly reduced the R&D investment, sales revenues, gross margins, earnings, and return on equity for medical device manufacturing firms,” said Lee.

The cuts he found included:

-R&D expenditures - $34 million
-Sales revenue - $188 million
-Gross margins - $375 million
-Earnings - $68 million

His research looked first at the real cost to makers, but discovered that the tax also hit operating and marketing costs.

The tax is surprisingly broad, too. It doesn't just hit the high end, but is slapped on everything from needles and syringes to coronary stents, defibrillators and irradiation equipment -- although it does exempt hearing aids, eyeglasses and contact lenses.

Lee also looked at different ways to mitigate the tax impact for firms, including raising prices, which did not really happen, he said, because of the buying clout of the bigger consumers like large hospitals and clinics.

Instead of bumping up pricing, medical device makers have responded by spreading out their customer base and boosting international sales – which don't get hit with the tax.

“The device tax significantly increased their international sales revenue, international diversification, and customer diversification in the U.S. markets,” stated Lee.

Firms also slashed sales operating costs and general and administrative overhead, but continued to spend for advertising and labor.

The congressional appropriations act in 2015 had a two-year moratorium on the medical device excise tax. Then, in January, that was lengthened until 2020, at which time, industry leaders praised the decision.

“AdvaMed applauds passage of the two-year suspension of the medical device tax,” president and CEO Scott Whitaker of the Advanced Medical Technology Association said in a statement at the time. “This suspension is good news for American patients and American innovation. Congress' action – just days before medical technology innovators were set to start cutting checks to the IRS – means funds will not be diverted from current investments in jobs, capital improvements and research into new treatments and cures.”
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