Medical Device Firms, Prepare for More Difficult Future Regardless of Supreme Court Decision Today

July 11, 2012 — Leave a comment

The Supreme Court is expected to rule on Obamacare today.  For those of you not paying attention or hiding in the hopes it will go away, Obamacare is the sweeping healthcare reform passed by the Obama administration.  Parts of the law have been challenged and the Supreme Court is expected to rule today on the constitutionality of the law.

There are many parts of the legislation that are hotly contested.  One of the items is a new sales tax on medical devices.  Beginning in 2013, Medical Device and Diagnostic companies will be required to pay a “tax” of 2.3% of their sales.   Some estimate that this will cost America 14,000 to 47,000 jobs and reduce research and development spending by $2B.   There is also concern that this will impact patient care and access to new technologies as innovation is squeezed.

Regardless of the Supreme Court decision, wise medical devices & diagnostic companies should be preparing as if the tax is going into effect.  Why?  Some simple math shows the profound impact that the “tax” or price erosion in general has on medical devices & diagnostic profits (note: the tax is on gross sales. The math here is illustrative and meant to be simple).  Assuming a pre-tax profit margin of 18%, each 1% “tax” or price erosion amounts to a reduction in pre-tax profits of 5.6%.  The total 2.3% tax would amount to a reduction in pre-tax profits of at least 13%.  No wonder the industry and many legislators are upset about the tax.

Whether the law is ruled unconstitutional or not, the pressure on the healthcare system because of demographic changes, public debt levels, current healthcare spending, and misaligned incentives will likely continue.  This means that medical devices & diagnostic companies will be facing some form of accelerating cost and pricing pressure going forward.  So, rather than breathe a sigh of relief if the Supreme Court overturns Obamacare, medical technology companies should be preparing for the future.

Preparing for the future means being smart about how to manage pricing and value.  Responding to the potential “tax” by just raising prices could cause more harm than good.  It would put the industry back into the spotlight and, in many parts of the industry, the players lack the pricing power to make such a move.  Rather smart companies should realize that there are many ways to plug price leaks, capture value, and grow profits.  In this author’s experience, medical technology companies who have not taken a hard look at pricing and value processes likely lose 1-5% price/revenue annually through sloppy pricing.

Here are a few areas to take a look at:

  1. Get better at discount management
  2. Ensure customer compliance  to existing sales contracts
  3. Eliminate unnecessary freebees and giveaways
  4. Charge for or improve pricing of services
  5. Improve sales negotiations through training, process, and an offering strategy
  6. Value price new technologies
  7. Fire unprofitable customers

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