As the federal budget deadline looms on the horizon, much remains at stake for Minnesota’s startup community. After a two-year suspension of a medical device excise tax, manufacturers of products like pacemakers, catheters, and artificial knees may have to start paying up by the end of the month. These expenses are expected to hit Minnesota harder than anywhere else in the country, costing the state in investment, research and development efforts, and jobs.
Let’s break it down.
The medical device tax, a 2.3% excise tax placed on the sale of medical devices within the United States, was developed as part of the Affordable Healthcare Act in 2010 to help finance the expanded health insurance coverage provided under this federal statute.
The medical device tax was highly unpopular in Congress, with particularly strong opposition from the medtech-heavy states of Minnesota and Massachusetts. With dual-party support, the tax was suspended on the sale of medical devices for two years, between January 1, 2016 and December 31, 2017.
“The suspension itself was a bipartisan package that was signed by President Obama. The history of this tax and its suspension included the architect of the Affordable Healthcare Act. This is something that we’ve felt was well understood and there was broad agreement on it,” explained Shaye Mandle, President and CEO of Medical Alley Association, a Twin Cities-based organization that influences policy, fosters connections, and gathers intelligence to support Minnesota’s health industries.
The tax was originally predicted to generate $30B annually to help fund the Affordable Healthcare Act, Mandle explained.
“The thirty billion never really materialized. It was a smaller number, more like twenty to twenty-one billion,” he said.
This tax was paid on revenue- not profits- and was expected to drastically impact medical device manufacturers, eighty percent of which, at least in the United States, employ less than fifty people.
With President Trump’s tax reform plan that was signed into law this December, the corporate income tax rate was lowered from 35% to 21%. However, repeal of the medical device tax was not included in the $1.5T tax reform package, allowing the suspension of the medical device tax to expire for sales of medical devices in the U.S. starting on January 1, 2018.
So, instead of seeing a tax break, the medical device industry will actually see a tax come back that had not been contributing to the federal budget for a few years.
“For the last two years, we’ve seen medical device companies make significant investments in Minnesota,” said Mandle. “Investments in early stage companies across healthcare but also in devices, keeps going up. We’ve had record years for the past couple of years.”
The investments included a record high $735M raised in 2017 by 85 companies in Minnesota, $399M of which was raised by 44 medical device companies in the state, according to Medical Alley Association’s latest numbers.
The U.S. Joint Committee on Taxation predicts that repeal of the medical device tax will reduce federal revenue by $1.37B in this year alone. Other advocates of the tax say that medical device manufacturers will benefit from the corporate tax decrease enacted by the current administration. But Mandle says that besides massive, profitable companies like Medtronic and Boston Scientific, this tax cut is not even relevant to the majority of medical device companies.
There may be a prime opportunity for a congressional repeal of the tax in conjunction with the latest federal budget, which must be approved by January 19th. If the tax is not suspended once again as part of this deal, medical device manufacturers selling products within the U.S. will have to start paying the tax this month, which Mandle says will disproportionally affect Minnesota companies, especially early stage startups.
“The very first thing that the device tax will do is have an impact on existing companies and how many people they have and what they can invest in or not,” Mandle explained. “But the long term, I think and this is particularly important for Rochester, is how there can be growth in [the medical device] marketplace. Uncertainty about the device tax alone has an impact. Actually having the device tax has a significant impact.”
Mandle says the tax will likely influence hiring and spending in small medical device companies in the state. This ultimately could impede research and development efforts, innovation, and ultimately slow down technologies from getting to the patient. According to the U.S. Department of Commerce, 29,000 U.S. jobs were lost while the tax was previously in effect, leading to a $2B decrease in research and development efforts.
Minnesota’s ‘Medical Alley’- a region stretching from Duluth, through the Twin Cities, down to Rochester- houses the “most densely concentrated cluster of medical technology companies in the entire world,” said Mandle. This region has a denser concentration of medtech than even Boston and Silicon Valley. Recoil from the medical device tax is expected to hit Minnesotan small medical device manufacturers harder than anywhere else in the U.S.
If (or more likely when) the tax comes back, Mandle predicts it will be worse for companies than when it was originally instated in 2013. He said the industry was just not prepared for the tax burden, especially since the issue had previously been resolved. He said the medical device industry, advocates like Medical Alley Association, and Minnesota’s federal delegation are working hard to get their message across in Washington.
If not repealed or suspended, the medical device tax will not only affect the Twin Cities, it could also have significant impact in Rochester, especially in a region like the Destination Medical Center’s Discovery Square District, an area aimed at the rapid commercialization of technology to improve health. Mandle says a healthy medical device sector is essential to “grow and be successful along with digital health and biotech and all of the things that the Mayo Clinic and Rochester are world leaders in.” Uncertainty in the medical device industry from an unstable market or unclear timeline to get to sales or profits hurts investment for early stage companies, disrupting this piece of the puzzle.
“With Rochester being one of those places that is going to help define what economic and healthcare growth looks like, this is not helpful,” advised Mandle.
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