David Lucchino: The 2.3 percent excise tax on the medical devices sector would hamper innovation, force layoffs and cripple loss-making start-ups. (Alex E. Proimos/flickr)

Passing through Kendall Square one might never get a sense of the medical research and innovation going on here. But when my business partner and I founded Semprus BioSciences, a medical device company, we had an inkling it was the place to be. It turned out to be one of our best decisions.

In Kendall, our neighbors are some of the smartest people in the world — innovative companies that create better disease detection and whose therapies and products help treat cystic fibrosis, cancer, diabetes and many other life threatening diseases.

Dr. Robert Langer’s research lab at the MIT, for example, was the subject of a recent article in The New York Times:

“The Langer Lab is on the front lines of turning discoveries made in the lab into a range of drugs and drug delivery systems. Without this kind of technology transfer, the thinking goes, scientific discoveries might well sit on the shelf, stifling innovation.”

But labs and companies like Langer’s, those that are tackling many of today’s toughest medical problems, face a daunting threat that may well stifle that innovation and technology transfer — the true lifeblood of our industry.

In 2010, Congress passed a tax on medical devices to offset a portion of the $1 trillion cost of the Patient Protection and Affordable Care Act, better known as “Obamacare.”

On Jan. 1, 2013 this 2.3 percent tax will be imposed on the manufacture and importation of medical devices, including a vast range of products — from tongue depressors and ultrasound equipment to artificial hips and yes, the vascular access catheters recently invented by my company.

Though seemingly small, according to the National Center for Policy Analysis the medical device tax would add approximately $3 billion annually to the taxes paid by medical device firms — a 100 percent increase.

The result? For starters, the tax will lead to reductions in research and development that will stifle the search for tomorrow’s treatments and cures, and prevent patients from receiving the life-saving medical devices and care they need.

There is also the potentially devastating impact on employment and the economy to consider. In Massachusetts, medical technology is a pillar of the state economy, employing 82,000 med-tech workers and contributing $17.6 billion to the state coffers annually. Nationwide, the industry creates more than two million jobs directly and indirectly. It’s also one of the few U.S. manufacturing sectors that is a net exporter, and its innovations help reduce the human and economic burden of chronic disease.

However, according to Diana Furchtgott-Roth, former chief Labor Department economist, the coming excise tax will eliminate more than 45,000 high paying med-tech jobs across the country.

While the U.S. is currently the world leader in medical technology, the tax threatens our leadership because it puts an additional burden on medical device innovators already struggling under the weight of an uncompetitive tax system. The new tax will be levied on medical device sales in the U.S. regardless of whether the company is making a profit.

A collaborative effort is afoot in Washington and a bill to repeal the “innovation tax” has strong bipartisan support in Congress.

But our legislators must act swiftly during this lame duck session. There is too much at stake for patients, health care providers, and our economy and to do anything less.

David Lucchino serves on the board of directors Massachusetts Biotechnology Council and the Advanced Medical Technology Association (AdvaMed), the latter of which has spearheaded the move to repeal the medical device tax.


The views and opinions expressed in this piece are solely those of the writer and do not in any way reflect the views of WBUR management or its employees.

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  • Sean McElroy

    By “collaborative effort” you mean the medical device manufacturers lobbyists have bombarded Washington with their “poor me” message. Why don’t they spend the money they would have spent on Congressional Luncheons on innovating ways to provide excellent technological health care solutions at reduced costs?

  • Andrew Winson

    If a 2.3% tax means that the medical device industry is paying 100% more, that means that they were effectively only paying 2.3% in taxes to begin with. Nice racket if you can get it. I’d LOVE it if my income was taxed so little.

    • Don Starr

      Businesses generally [and currently] pay corporate income taxes on profits. If a company has a very low profit margin, their taxes are, rightly, very low.

      Howver, this new 2.3% tax is on gross sales; profit is irrelevant.

      A business that grosses $10M with a 5% profit margin (and presuming all of that profit is taxable) currently pays about $170k in federal corporate income tax. The new tax will add another $230k.

      If that same business only has a 2% profit margin, the new tax will cause it to lose money. The gross profit (before paying normal corporate income tax) is $200k – but the new Obamacare tax is still $230k.

      I don’t believe for a second, though, that the manufacturers won’t just increase their prices to cover the new tax. That is, a device that currently sells for $1000 will increase to $1023.55, so that the manufacturer doesn’t see any “hit” in his profits.

  • Kathryn L

    Last I looked, the average gross margin at a medical device company was around 60% (so for every $1 in sales the company had spent $0.40 to make that product). Compare that to other industries and it’s hard to feel like medical device manufacturers are being put on. And after all, when more of us are insured there will be higher demand for their products.

  • Lisa K.

    I work in administration for the medical field and we have already been notified by our suppliers of price increases for supplies because of this tax. It will be passed on to consumers. Healthcare is NOT going to be cheaper…ever!

    • Nick Sophinos

      Yeah Lisa, you are validating my initial impression that the manufacturers would just pass the cost along to the hospitals anyway.

  • jefe68

    So a 2.3% tax is all it takes to send an industry into writing articles that use threats to employment and a rise in heath care costs and top that off this industry is saying it wont innovate anymore. I hope Mr. Lucchino is aware that the US has a lower level of corporate taxes than Germany, Denmark, and a host of other major industrial nations and yet they all spend less than we do on health care, which includes medical devices.

    The level of our dysfunctional health care system is very clear in this article, that’s for sure.

  • Slack

    Yes, and if my property taxes went up 2.3 percent, I guess I’d stop paying my mortgage, abandon my house and move into a shelter because the sky would actually fall on my house.

    • Don Starr

      The businesses’ taxes aren’t going up by 2.3%. It’s a brand new 2.3% tax on gross sales.

      If you want to compare it to personal income taxes, it would be something like this:
      * AGI of $100k
      * $45k in deductions (mortgage interest, 4 exemptions, property tax, state income tax, etc.)
      * $55k in taxable income
      * Fed income tax is $7404 (2011 tax tables, married/joint)

      The new 2.3% tax is assessed on a manufacturer’s gross sales, analogous to your AGI. So, the new tax is $2300. Your new federal tax liability is $9704. Your taxes didn’t go up by 2.3%; they went up by 31% (2300/7404).

      Let’s presume that you previously had $2000 left at the end of the year to put in the bank (for a corporation, this would be “net profit”, with a margin of 2%). With this new tax, you still have to pay that $2300. You’re now operating at a loss. You can no longer put any money into savings, and you have to figure out how to lower your annual expenses.