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Congress Suspends Medical Device Tax

The medical device tax, fought by industry since its inception, was suspended as part of the $1.8 trillion spending and tax bill passed by Congress and signed by President Obama in the waning days of 2015.
The 2.3 percent tax on medical device sales received a suspension for 2016 and 2017, and is expected to cost the U.S. $3.4 billion during those two years, according to the Joint Committee on Taxation.
Associations like AdvaMed and MDMA quickly applauded the news, noting that the tax had cost the medical device industry jobs and pinched research and development resources.
  • An MDMA survey of 109 medical device executives conducted during November and December 2014 found that 72 percent of companies had slowed or halted job creation as a result of the tax. Survey respondents said that if the tax were repealed, 85 percent would hire new employees in the U.S.
  • Further, 80 percent of respondents indicated that they would increase R&D investments following a repeal.

On the other hand, a 2015 Emergo Group survey found that most U.S. companies did not make major changes in 2014 in response to the levy, suggesting that the tax has become part of daily business.  
Based upon responses from 685 medical device executives in the U.S., the Emergo Group survey found that:
  • 57% of companies made no significant changes
  • 29% raised prices
  • 18% invested less in R&D
  • 14% reduced staff
  • 8% lowered production costs without reducing staff

The medical device tax was expected to provide the government with varying revenues of $20 billion to $30 billion between 2013 and 2019—numbers that did not pan out. In the first half of 2013 a collection of $913.4 million was reported, prompting the Treasury Inspector General for Tax Administration to issue a report on needed IRS improvements to ensure accurate reporting and payment of the tax. The report found discrepancies of $117.8 million in overstated and understated taxes for that period. 
In the next two years, companies with a higher percentage of U.S. sales stand to benefit the most from the suspension. Of the 17 largest orthopaedic companies, those with a higher proportion of U.S. sales include Globus Medical, Integra LifeSciences, Medtronic, NuVasive, Orthofix, Stryker and Wright Medical.
A two-year suspension of the tax is a positive step that offers potential for future delays or an overall repeal. Still, delay and not repeal leaves companies with uncertainty. Concerns over the device tax have seemed to decrease since its implementation in 2013, but everyone remembers the frenzied climate when the tax was enacted in 2010 and levied in January 2013. Without a full repeal, companies may remain limited in their strategic actions.