IMPACT OF THE MEDICAL DEVICE EXCISE TAX. A Status Report from AdvaMed January 2015

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1 IMPACT OF THE MEDICAL DEVICE EXCISE TAX A Status Report from AdvaMed January 2015

2 introduction Prior to implementation of the medical device excise tax on Jan. 1, 2013, assessments by device manufacturers, studies by academic researchers, and independent analyses of the industry suggested that this tax would have a significant, negative impact on employment, research and development, and industry competitiveness. Supporters of the tax disputed some of these assessments. To provide information on the actual as opposed to hypothetical impact of the tax, AdvaMed conducted an electronic survey of its members regarding the first-year impact of the tax in late Consistent with the academic studies, the survey found substantial negative impacts on jobs and R&D, as well as companies that deferred or cancelled capital investments, deferred or cancelled plans to open new facilities, and reduced investment in start-up companies. To assess the ongoing effects of the tax, AdvaMed repeated the survey at the end of The responses to the survey were generalized to the industry as a whole based on the ratio of revenues of the responding companies to revenues of the overall industry. Respondents accounted for 49 percent of total industry revenues. key findings JOB LOSS Job losses from the tax continue to mount, albeit at a slower rate. Two-thirds of companies in the survey said that they have decided to slow or halt U.S. job creation as a result of the tax. The tax resulted in employment reductions of 14,000 industry workers in 2013 and years prior to implementation of the tax, with approximately an additional 4,500 jobs lost in Furthermore, the industry will forgo hiring of nearly 20,500 employees over the next five years. Considering both jobs lost and jobs not created, the tax will result in 39,000 fewer industry jobs. 195,000 LOST JOBS Independent estimates of the relationship between direct employment in the industry and indirect employment among suppliers and in the general economy found a ratio of four indirect jobs for each direct job. 2 Applying this ratio to jobs lost or forgone suggests that the impact of the tax on indirect employment could be as much as 156,000 jobs, for a total job loss due to the tax of 195,000 jobs.

3 key findings (cont d) REDUCED R&D More than one half of respondents (53 percent) said they had reduced R&D as a result of the tax. OTHER NEGATIVE IMPACTS Three-quarters of respondents said they had taken one or more of the following actions in response to the tax: deferred or cancelled capital investments; deferred or cancelled plans to open new facilities; reduced investment in start-up companies; found it more difficult to raise capital (among start-up companies); reduced or deferred increases in employee compensation. 75% OF RESPONDENTS CANCELLED REDUCED DEFERRED FUTURE IMPACTS While the focus of the survey is on the effects of the tax in its first two years, several questions were future oriented. Reponses suggested that there will be additional damage if the device tax is not repealed. On the positive side, repeal of the tax would significantly influence companies future actions. 46 percent of respondents said they would consider further reductions in employment if the tax is not repealed but more than seven in 10 respondents (71 percent) said they plan to reinstate forgone job growth if the medical device excise tax is repealed. Similarly, while 58 percent of respondents said they would consider further or first-time reductions in R&D if the device tax is not repealed 85 percent of respondents plan to reinstate forgone R&D projects if the tax is repealed.

4 what companies are saying The medical device excise tax is costing us approximately $250,000 to $300,000 per year in direct costs plus the costs of administration. This money would likely be deployed into hiring additional people in R&D and other projects and clinical studies. ISTO Technologies As a small company, the device tax has a very large impact on our profitability. In 2012 our net income on $17 million of revenue totaled $930,000. After the implementation of the device tax, our net income was reduced in 2013 by $400,000. Consensus Orthopedics The tax has also stopped us from investing in studies in the U.S. due to a lack of funds. Summit Medical Products We ve had to slow down our hiring in sales and R&D due to capital constraints. We are still funded, but many of my peers have had to close operations due to lack of funding. The tax puts further pressure on a start-up sector that is already under pressure due to regulatory and reimbursement uncertainties. Ceterix Orthopaedics

5 methodology & additional data As noted above, the survey was conducted electronically between Nov. 20 and Dec. 12, The survey was sent to every AdvaMed company. The 55 responding companies accounted for approximately 20 percent of member companies, 85 percent of member company domestic sales revenues, and 49 percent of total U.S. revenues of the medical device and diagnostics industry. Respondents were almost evenly divided between large and small companies, with 40 percent having sales below $100 million and the remainder with sales above this amount. As is typical for the industry as a whole, survey respondents were geographically diverse, reporting headquarters locations in 21 states (Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, Ohio, Oregon, Pennsylvania, Tennessee, Texas, and Utah). Respondents reported employment in all 50 states. Sixty-nine percent of the respondents are currently operating at a profit, while 31 percent are not. Responses were expanded to national estimates of employment impact using the following methodology. U.S. total expenditures on medical devices and diagnostics in 2011 were $159.4 billion. 3 This figure was assumed to equal medical technology company revenues. This estimate was updated to 2013 using percentage increases in revenues in 2012 and 2013 for publicly traded pure device companies, yielding total industry revenues of $165.4 billion. 4 Respondents to the AdvaMed survey represented 49 percent of total industry revenues ($81.1 billion), so job losses and jobs foregone reported by survey respondents were multiplied by (165.4/81.1) to arrive at an estimate for the industry as a whole. 1. All 2013 figures come from Impact of the Medical Device Tax, A Status Report from AdvaMed, February, 2014, unless otherwise noted. The 2013 survey included reductions due to the tax in years prior to 2013, because some companies reduced employment in anticipation of the tax s going into effect, rather than waiting until The Lewin Group, State Impacts of the Medical Technology Industry, February, Guy King and Gerald Donahoe, Estimates of Medical Device Spending in the United States, June, 2014; 4. Ernst and Young, Pulse of the Industry: Medical Technology Report 2014 and Pulse of the Industry: Medical Technology Report Pure device companies are companies that are only in the business of manufacturing devices and diagnostics. Revenue increases for conglomerates for the device portion of their business are assumed to be similar.