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Medical device tax may spur price hikes, cost cuts

(Reuters) – Raising prices and cutting spending are among the steps medical device makers are considering to offset the impact of a new U.S. excise tax on the devices, set to take effect in 2013, according to a survey by global accounting and audit firm KPMG.

In a poll of financial executives for device manufacturers, 40% said their companies were contemplating actions such as price hikes, headcount reductions or changes in manufacturing processes to stay competitive, KPMG said in a report released on Wednesday.

The 2.3% tax on the sale of products ranging from pacemakers to elastic bandages, to be paid by the manufacturer or importer, was enacted as part of the healthcare reform law. The Internal Revenue Service and Treasury Department issued regulations for the tax in February.

“Companies are of the mindset that they are going to do everything possible to pass the impact of this tax along,” said Adam Uttley, a KPMG tax partner.

But companies could find it tough to raise prices in the current economic climate, he said.

Prices are falling for many products, such as stents used in treating clogged arteries and artificial hips and knees.

“There’s a lot of uncertainty about how successful their efforts will be, because of the competition in the market, but that’s not going to stop them from trying,” Uttley said.

Some device makers have already announced layoffs ahead of the tax, which takes effect in January 2013 and is meant to help pay for the healthcare law’s goal of expanding health insurance to millions of Americans.

The U.S. medical device industry trade group AdvaMed has argued the tax will stifle innovation and send jobs overseas, and some lawmakers have called for its repeal.

In the KPMG survey, conducted in March, 615 of 190 financial executives polled said the tax will hurt their companies’ bottom lines. Sixty percent said it will increase their tax compliance costs.

Half of the executives said they were unsure what actions their companies might take.

Uttley said some companies are waiting to see if the U.S. Supreme Court will overturn the healthcare law or some of its provisions. The court is expected to issue decisions in the challenge to the law by late June.

“There’s a whole plethora of medical device companies that are hoping the device tax is going to go away and are postponing decisions until they see whether the tax is going to survive,” Uttley said.

If the tax remains the law, there will likely be renewed calls in Congress for it to be repealed, he said.