Industry may be overstating effect of device tax

By now, we're all well aware of the medical device industry's qualms with the 2.3% device tax, set to take effect in January. It will hamper R&D. It will cost jobs. It will force firms overseas. According to some, it will even cost patients their lives.

But MedCity News' Merrill Goozner argues that devicemakers' inscrutable pricing system and high profit margins make them more than capable of dealing with the charge, valued at $30 billion over 10 years. 

For starters, the claim that the tax will debilitate R&D spending: The industry pulled down about $40 billion in U.S. earnings last year, Goozner points out, and, unlike Big Pharma, devicemakers usually don't have to spend as much on developing newer versions of existing products. Thanks to the 510(k) process, device firms can often get new techs on the market with few or no additional clinical trials, Goozner writes, and this allows devicemakers to reap big profits in exchange for small, front-end investments.

And then there's pricing. Device firms often enter non-disclosure agreements with the hospitals they serve, thus keeping the prices they pay for gadgets under wraps, according to Goozner. This practice limits hospitals and payers from comparing prices and creates a not-so-competitive market for devicemakers, allowing them to cash in on potentially sky-high profit margins, Goozner writes.

Hospital groups agree. In a letter to the IRS in May, three hospital associations warned the agency that devicemakers, through their opaque pricing structure, might use the 2.3% tax as an excuse to hike prices, deduct the tax from their income and create a windfall in the process. 

The industry has dismissed this logic repeatedly, but it isn't finding many sympathetic ears in Washington. House Republicans successfully passed a tax repeal bill, but the Democrat-controlled Senate presents long odds for a similar victory there. Furthermore, the White House has already promised to veto any such legislation were it to clear the two chambers. AdvaMed, however, hasn't given up, saying it expects a year-end vote in the Senate on the issue.

- read Goozner's column

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