Medical Device Tax Renews January 1, 2018: Are you ERP ready?

The 2.3% medical devices tax was supposed to help pay for the Affordable Care Act (ACA).  The tax would yield about $30 billion annually but in the end Congress deferred it after a lengthy debate.  Now, the responsibility shifts to the new President and Congress and decision time is fast approaching. The tax called for a 2.3% charge on sales, with payments due semi-monthly. Because the excise tax is a business expense, the effective after-income-tax net cost is about 1.5%. With the decision on the new tax looming, medical device manufacturers and suppliers are now taking the time to evaluate their business management systems to determine if they’re capable of handling tax accounting.

In 2017, the proposed American Health Care Act (AHCA) will replace the current law. The initial proposal eliminated the excise tax, however, Congress is still debating the new bill. No one can say for certain what will change until it’s finalized. While ACHA could be less expensive than the ACA it replaces, medical device companies will look at ways to curtail and recover from the tax.

Large medical device suppliers such as Johnson & Johnson and Medtronic might look at the tax as just another business expense to avoid if possible.  However, much of the medical device industry is made up of businesses with fewer than 50 employees that could find the tax painful. For these affected companies, the tax might be used as a reason to delay their transition to an enterprise resource planning (ERP) system. However, the reality is that early adoption of ERP can stave off greater expenses later when a medical device company is focused on FDA regulatory compliance when bringing products to market.

We also heard politicians say that the ACHA is a replacement bill, but it’s difficult to know what the outcome will be. However, suffice to say, Congress will pass some form of replacement bill for the ACHA and the President will sign it into law. The medical device tax will not be a specific part of the new law, but because money is needed to pay for ACHA, there will be a tax or fee hidden within to replace the money the medical device tax would have yielded.

Ultimately, medical device businesses need the kind of record keeping that ERP provides when managing their taxes. The need for traceability alone makes a good ERP solution useful, but when you consider compliance requirements and detailed record keeping that a medical device manufacturer or supplier needs, ERP becomes essential.

To the extent that any medical device manufacturer risk their future by avoiding or delaying ERP adoption, the ACHA could have significant unintended costs to the industry. Apart from looming taxes, medical device companies face many other challenges too and ERP represents the unifying solution to overcome them. Download Top 5 Business Challenges Solved for Growing Business in the Life Sciences Industry to learn more about how ERP can help medical device manufactureres overcome tax and other industry challenges.