Magnitude Matters

Steve Halasey, Contributing Editor

Topping the agenda of medtech executives for 2013 is repeal of the medical device excise tax, which went into effect on January 1. Enacted as part of the healthcare reform legislation of 2010, the new law requires manufacturers, producers, and importers to pay a tax of 2.3% on the sales price of most medical devices sold in the United States. The Internal Revenue Service issued final regulations and interim guidelines for the tax in December 2012.

The Congressional Budget Office pegs industry’s liability over the first 10 years of the tax at $29 billion. Industry’s bill is expected to total roughly $1.7 billion this year, gradually rising to $3.6 billion in 2022. In the isolation of a tax table, the significance of those numbers is a bit difficult to grasp. But they’re a lot easier to comprehend when placed against the scale of a meaningful industry metric— like the amount of venture capital (VC) invested annually in early-stage medtech companies.

Capital In, Tax Out

Venture capital is the fuel that powers medtech’s engines of innovation. According to the National Venture Capital Association, VC-funded companies made up 83% of medical device employment in 2006. And in 2007, VC investment in the medical device industry reached an all-time high, when some 401 deals captured $3.8 billion in funding. From 1995 through the third quarter of 2012, VC investment in medical device companies averaged just over $2 billion annually.

Using these figures as a measuring stick, it might be said that the device tax will be taking out of circulation nearly eight years’ worth of record-level investment in medical device innovation— and more than 14 years’ worth at the historical average. Under any foreseeable market conditions, it is unlikely that such a funding gap can be filled by existing investors or established device companies.

Legitimizing the Future

According to a 2009 article in Health Affairs, venture investors tend to support market entry for firms in sectors legitimized by previous mergers and acquisitions, by successful initial public offerings, or by the investments of others. Conversely, reduced levels of investment may discourage VCs from supporting the entry of new companies into the field.

VCs may remain active in the medical device field in spite of the challenges created by the new tax. But given opportunities to support device innovation overseas on more favorable terms—or even to move into other industries or healthcare sectors—some investors may choose to do so. It is doubtful whether they will ever return.

Hanging in the Balance

In studies commissioned by the Advanced Medical Technology Association (AdvaMed) and others, analysts have projected that imposition of the device tax will result in reduced investment in research and development, industry plant closures, and job losses exceeding 10% of the medtech workforce. In turn, hundreds of health sector stakeholders have joined with industry leaders to call for repeal of the tax. A November 2012 letter to Senate leadership signed by more than 800 organizations, associations, companies, patients, and others is available on the Medical Device Manufacturers Association Web site at www.medicaldevices.org/node/1392 .

There is ample time for Congress to act before April 30, when device companies must file their first quarterly returns. But it is certainly no overstatement to say that the health of the US medical device ecosystem and patient access to medtech innovation depend on the outcome.

Steve Halasey is vice president for programs at the Institute for Health Technology Studies (InHealth), Washington, DC.

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