The health care reform law and its excise tax on medical device sales is already driving companies to seek lower-cost areas to plant their flags in, according to Princeton, N.J.-based research firm The Boyd Co. Inc.
“The big trend is towards smaller, lower-cost cities and it’s because of Obamacare and its 2.3 percent tax on medical device sales,” principal John Boyd Jr. told MassDevice.
The report examines the cost of doing business in 55 cities for a hypothetical, 175,000-sq.-ft. production plant employing 325 workers and shipping domestically. Factoring in wages, benefits, utilities, state and local taxes and shipping, it compares medical device cluster cities with other potential locales.
Concerns over the 2.3 percent excise tax are almost palpable, as companies and industry councils flood Washington with lobbyists, even beseeching the IRS as it writes the rules for the tax before it takes effect in 2013.
Device companies are also facing new FDA initiatives to make its 510(k) clearance process more rigorous (and therefore more costly). Medical device makers already spend 75 percent of their research and development budgets on compliance, according to Boyd.
The report also forecasts that a significant number of final assembly and quality control jobs will be coming back to the U.S. over the next decade from places like China, India and the Caribbean due to increased patent, counterfeiting and piracy concerns.
“This industry is one that is least vulnerable to being outsourced to China and a lot of that has to to with piracy concerns,” Boyd said.
The conflict between keeping research and development close to larger U.S. cities and academic areas, which are more expensive, and lower-cost areas is “the tightrope that the industry walks,” he noted.
“Life sciences obviously places a high premium on intellectual capital, access to research institutions and access to NIH funding venture capital,” Boyd said. “What we’re seeing is new competition on the production end.”
The emerging small markets are all cities that have strong health care institutions. For example, Sioux Falls, S.D., has Avera and Sanford Health and close access to Minneapolis, where many medical device companies are based, he noted. Sioux Falls also boasts the precedent of attracting Hematech Inc. from Connecticut.
Sioux Falls was the cheapest of all the American cities examined by the research firm, at annual costs of $22.6 million. The same company would pay $28.6 million a year for the privilege of settling down in greater Boston. The most expensive area to do business, according to the report, is the San Jose/Palo Alto, Calif. area.
The Boyd Co. Inc. is providing the report for free. Interested readers can contact the company for details.