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The Medical Device Excise Tax: Is the End in Sight?

February 16, 2015

MDET and its impact on the medical device industry.

The medical device excise tax (MDET) has been the subject of heated opposition since it was introduced. Now, with Republicans controlling both houses of Congress, repeal of the tax is looking more promising. For venture capital and private equity firms, this means that investing in the medical device industry may soon become more attractive. But repeal isn’t a sure thing.

The Tax in a Nutshell

Since Jan. 1, 2013, a 2.3% excise tax has been imposed on the sale of certain medical devices to help fund expanded health care insurance coverage under the Affordable Care Act (ACA). Generally, the manufacturer or importer of a taxable medical device is liable for the MDET. The theory behind the MDET was that the increased number of insured Americans under the ACA would boost demand for medical devices.

The MDET applies to a wide range of products, including pacemakers, artificial joints, surgical gloves and dental instruments. It generally doesn’t cover devices that consumers buy for individual use, such as eyeglasses, contact lenses, hearing aids and wheelchairs.

Opposition to the Tax

The medical device industry is strongly opposed to the MDET. It argues that, because the MDET increases the effective tax rate on many medical technology companies, it will reduce financial resources that should be used for research and development, clinical trials and investments in manufacturers — stifling innovation and costing thousands of high-paying jobs.

Manufacturers also contend the costs of the MDET will lead to higher health care costs. And some argue that the ACA won’t substantially increase demand for medical devices because such devices typically are for senior citizens already covered by Medicare.

Repeal on the Way?

Republicans have identified repeal of the MDET as a priority for the new Congress. A repeal bill (H.R. 160) was introduced in the House of Representatives on Jan. 6 and, as of Jan. 30, had 272 co-sponsors, including some Democrats. A bipartisan group introduced a similar bill in the Senate (S. 149) on Jan. 13. President Obama has threatened to veto previous repeal legislation, though, and it’s not clear if there would be enough votes in Congress to override a veto.

Whether you’re considering getting into this industry or looking to divest yourself of such investments at an attractive price, keep a close eye on Congress. For more information on the MDET and its impact on the medical device industry, please contact us.

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