At the start of this year, a controversial feature of President Obama's Affordable Care Act (ACA) went into effect.
Under the ACA, medical devices companies will have to pay new tax of 2.3% on gross sales. While medical devices companies have opposed the tax, saying it will hurt research and development activities, proponents of ACA say, of course, that more taxes will be good for them. In progressive economics, companies such as Hologic Inc. and St. Jude Medical Inc. will get more customers due to their higher taxes and that will boost sales of medical devices.
President Obama's ACA was upheld by the Supreme Court last year and the ambitious plan will bring sweeping changes to the U.S. healthcare landscape, along with a lot more taxes. An estimated 32 million additional individuals are expected to insured by 2019 as a result of ACA but insuring people, many of whom are young and did not want to pay for insurance at all, requires funding, and part of the new taxes to generate revenue requires medical devices companies to pay 2.3% tax on their gross sales.
The new tax is expected to cost companies approximately $30 billion in revenue in 10 years. However, medical device companies say that the additional costs will hurt their research and development activities and hamper new product development. Medical devices companies have also said that the tax will force them to reduce workforce in order to lower costs. In August of last year, St. Jude Medical had announced that it will eliminate 300 jobs, which will reduce its pre-tax operating expenses by nearly $50-$60 million annually starting in 2013.
The big question for medical device manufacturers is whether ACA will actually benefit them, as politicians claim. Proponents of healthcare reform claim it will, though they also claimed Cash For Clunkers would be inexpensive and health the environment, and it was instead a negative for both. ACA will result in additional insured individuals and higher cost but easier access to devices should mean a larger market for medical device companies.
Politicians argue that the increase in sales from the additional insured individuals will offset the increase in costs due to the new tax for medical device companies. Medical device manufacturers don't believe it, and are expected to continue to reduce costs in the near-term to lower their expenses.