As one of my ongoing roles, I am chairman of the Utah Technology Council. In a recent trustee meeting, one of my associates, Kelvyn Cullimore, CEO of medical device company Dynatronics, provided perspective on what the coming changes of Obamacare will mean. He spoke particularly about the impact for organizations, such as his own, that will be impacted by the proposed medical device excise tax.
For all organizations, while much is still unknown, the implications of the Affordable Care Act (Obamacare) will be immense. Regardless of political views, there are aspects of the changes entrepreneurs must take into account as they plan their business and employment strategies for 2013 and beyond.
Cullimore notes that medical device companies will be hit especially hard. Dynatronics employs 160 people. The issues it faces will apply to many other organizations as well.
Dynatronics acquired several of its distributors in 2007 as a means to protect its distribution channel. After the acquisitions, the company was able to survive the adverse market from 2008-2010.
Coming out of the recession, the company decided to invest more than $2 million in research and development to develop new products and create profits the company would be able to recognize for shareholders in 2013 and beyond. While those higher research and development costs have significantly impacted profitability for the last two fiscal years, the company is positioned well for improved profitability in coming years.
As every entrepreneur knows, innovation is not only critical to survival, it is essential to sustained profitability.
While Cullimore notes that few people would argue with the benefits of eliminating limits on insurance due to pre-existing conditions and allowing children to remain on their parents’ insurance to age 26, the cost of enacting Obamacare’s changes is estimated to exceed
$2 trillion over 10 years. The money to cover these costs is designed to come from two places:
• Reducing the scheduled increases in future Medicare benefits; and
• Increased taxes.
Of particular interest to companies such as Dynatronics is the excise tax on medical device companies. This 2.3 percent tax is particularly frightening because it is levied on top-line sales, even if the company doesn’t earn a bottom-line profit in a given year.
The medical device industry comprises 409,000 direct jobs and close to 2 million indirect jobs, according to the Medical Device Manufacturers Association. Only 10 percent of these companies have 500 or more employees, while 80 percent have fewer than 50 employees.
For those medical device companies who are making a profit, the 2.3 percent excise constitutes a tax within a tax. For a company making a 7 percent pre-tax profit, for example, the 2.3 percent excise tax would comprise 33 percent of their entire net profit — and that price tag would be in addition to the regular income taxes a company may owe on its earnings. Very literally, it amounts to a tax on top of a tax.
In Dynatronic’s case, had this excise tax been in effect during 2012, the company that had only broken even would have had to come up with an additional $400,000 to pay the excise. Where would that money have come from?
Cullimore says the company would have had to raise the price of its products in a market that would likely not tolerate more than the smallest of increases. It likely would have had to limit investment in R&D as well as consider other cost reductions, including layoffs.
Decreasing the amount of research and development would have decreased the amount of innovation the organization could bring to the fore. And, as previously stated, innovation is a critical fuel to sustainability and producing the technologies that will ultimately make health care more affordable.
Why the particular “punishment” on medical device companies? Cullimore says the theory is that the act will result in more devices being purchased, therefore producing a windfall for manufacturers that would offset the new tax.
Will there be layoffs? At 160 employees, Cullimore’s company currently does not plan any layoffs as the result of the tax, but he acknowledges that when details arrive, it is highly possible that many companies may have to make rapid changes in direction on the fly.
Do you have additional thoughts and comments? As always, I’d love to hear what’s on your mind, either here or via @AskAlanEHall or www.AlanEHall.com. This article originally appeared in Alan’s weekly Forbes column.