New US tax could encourage medical device outsourcing, says report

Excise tax to be imposed in 2013

A new tax on device manufacturers as part of healthcare reform in the US could help to drive the outsourcing of medical devices, according to a new report by Kalorama information.

The healthcare market research publisher’s report, Contract Manufacturing in Medical Devices (Materials, Processing, Electronics, Finished Products), finds that the once conservative medical device industry is outsourcing at an increasing rate, and the new tax, which could put pressure on margins, might be a factor in growing the US$60bn market for outsourcing medical devices and device parts.

The Patient Protection and Affordable Care Act (PPACA) will impose a 2.3% excise tax on ‘taxable medical device’ sales in 1 January 2013. The tax applies to medical devices intended for human use, but exempts spectacles, contact lenses and hearing aids, as well as devices that are ‘generally purchased by the general public for retail or individual use’ as determined by the US Secretary of the Treasury. The Medical Device Manufacturers Association (MDMA) and other groups successfully fought to reduce the tax, but even in its revised form Kalorama thinks there will be an impact.

“The tax itself won't force a firm to outsource,” said Bruce Carlson, publisher of Kalorama Information. “But since the law taxes revenues notwithstanding the cost of manufacture – it could add further pressure to bring costs down in order to restore profits.”

Because the excise tax does not include a blanket exemption for Class I devices – the large category of non-retail Class 1 products – Kalorama says a range of medical devices, including low-risk hospital and doctors’ office supplies, will be subject to the new tax.

Kalorama Information's report projects revenues for various areas of device manufacturing services.

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