Medical device tax’s research and development impact


Today, I’m aiming to address a very narrow question: has the Affordable Care Act’s medical device excise tax had an impact on research and development? The answer is simple: no.

The 2.3% tax manufacturers have to pay when they sell certain medical devices (to help cover ACA costs) went into effect January 2013. It’s expected to raise about $29 billion in the first 10 years, according to the nonpartisan Joint Committee on Taxation. (Since the tax is deductible, the estimated actual net tax effect is just 1.5%.)

A survey of the medical device industry suggests the tax had limited impact on reduced research and development expenditures. Less than 1/3 of respondents indicated a negative R&D affect. AdvaMed, the trade organization for the medical device industry conducted the 2013 member survey to identify the tax’s impact. It’s tough to say how representative this survey is of the industry as a whole with only 15% of AdvaMed’s membership responding.

So let’s look at what Minnesota companies, Medtronic, St. Jude and Boston Scientific, reported in their Securities and Exchange Commission filings about R&D over the years.

According to its June 201310-K filing, Medtronic had increased R&D spending in recent years. Medtronic’s 10-Q, filed in March, 2014, notes a small decline in research and development in the last nine months but it attributes that to a funding shift for “investment in product support to enhance our quality systems in the Neuromodulation business and Diabetes Group.”

St. Jude Medical’s February, 201410-K filing shows that while the total dollar outlay in 2013 slightly declined, the company maintained a steady 12.6% of net sales expenditure on research and development, indicating a “continued commitment to fund future long-term growth opportunities.”

While it appears there’s an R&D decline, Boston Scientific’s experience is similar to St. Jude’s. In each case, R&D reflected about 12% of net sales. The Massachusetts-based company with a strong Twin Cities presence joins its Minnesota competitors with the ACA not adversely impacting R&D.

Large companies are not exclusively responsible for research and development in medical devices. Universities have significant biomedical engineering programs. For example, the University of Minnesota has the Institute for Engineering in Medicine, which focuses on five broad themes: Cardiovascular Engineering, Neuroengineering, Cellular and Molecular Bioengineering, Medical and Biological Imaging, and Medical Devices. The University of Iowa has a department of biomedical engineering with a similar research footprint. Since universities do not manufacture and sell medical devices, they are not subject to the tax.

Furthermore, the federal government finances a great deal of medical research. The National Science Foundation’s FY 2014 appropriations totaled $7.1 billion, $5.8 billion of which is allocated to research and related activities. Similarly, the National Institutes of Health provide substantial grant funding for medical research.

Finally, venture-backed start-up companies are responsible for a large portion of new device development.” For the most part, these start-up companies are engaged in research, not manufacturing, and generally do not pay the ACA excise tax.

Bottom line: it appears that the ACA has had little impact on R&D expenditures.