A provision in the federal health care law that the U.S. Supreme Court upheld last month requires companies that produce medical devices, such as hip replacements and catheters, to pay an additional tax on the products they sell in the United States.
Indiana’s many biotech companies say the tax will be devastating to their profit margins, but supporters of the tax say the companies stand to benefit from the health care law.
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Ferguson says Cook typically reinvests 10 percent of its profits. As it turns out, that’s the same percentage loss Indiana University business professor George Telthorst estimates the tax will amount to for medical device producers.“They are going to be taxed 2.3 percent of their total revenues as opposed to an income tax, so the effect of this is that when it ripples through their P&L, they’re really going to end up paying about another 10 percent income tax,” he says.
Here’s how that works. Say Cook sells a medical device for $100. It will be taxed 2.3 percent or $2.30. And if the company is making $20 profit on that product, 10 percent of its profits are now going to taxes.
So Telthorst says companies are going to have to cut somewhere and research seems like one of their only options.
“The rate of innovation in terms of next generation products, new products, improvements in products and therapies is going to be slower than it was,” he says. “We’re not at a bad place now but we will not be in as good as of a place in 10 years if this law is not changed.”
But Van de Water says if companies are really trying to stay competitive, they will absorb the cost.
“A difference of up to 2.3 percent in the price of that product isn’t going to be a major deciding factor on whether to go ahead with that research effort,” he says.
Van de Water does admit the tax will affect Indiana more than other states because of its focus on biological sciences. But, he argues, the state also stands to benefit most because of new patients who will be entering the market when all Americans are required to have health care.
Just weeks before the U.S. Supreme Court declared the health care law constitutional, the House of Representatives passed a repeal of the tax, but it faces likely stoppage in the Democratic controlled Senate.
http://indianapublicmedia.org/news/indiana-companies-medical-tax-stifle-innovation-33003/
