The Affordable Care Act contains a provision that imposes a 2.3% excise tax, effective January 1, 2013, on the total revenues, not net profits, of all medical device manufacturers in the United States. The excise tax will force many device companies to go out of business or go off shore. For all others, it will severely limit research and development spending and will force job cuts. The R & D cuts will reduce the competitiveness of American device makers. The overall effect of the tax will be to cause some devices to disappear from the market and others to go without improvements.
Over three quarters of all medical device companies are small firms, employing fifty or fewer employees. Profits for such firms are often less than a quarter of all revenues. From profits, as much as 15% or more is redirected into research and development. The market is characterized by a need for near constant innovation to remain competitive.
An example will suffice to illustrate the draconian nature of the new tax, now codified in IRS Code Section 4191. Assume that a small medical device company grosses $2.5 million per year and has profits of $100,000 annually. The 2.3% excise tax is applied to the $2.5 million, resulting in a tax liability of $57,500, a whopping 58% of profits. We must be mindful of the fact that this figure does not include other applicable federal taxes and fees or state and local taxes.
From this simple calculation, we can readily see that very large numbers of medical device companies will be eliminated, forced off shore, forced to terminate workers, and forced to sacrifice research and development funds. Medical device companies outside the United States stand to benefit considerably from those effects and will no doubt replace domestic manufacturers in areas of greatest need.