Starting in 2014, the Affordable Care Act will require the majority of Americans to carry health insurance, and the penalty for failing to do so is a fine. So health care reform would seem to bode well for medical start-ups, right? Not necessarily.
A recent article in the Wall Street Journal explored this issue, and made a few interesting points.
While the requirement to obtain health insurance should prove advantageous to companies invested in the medical field, a different provision may prove problematic. Next year, a 2.3 percent excise tax on medical device sales will go into effect. People in the medical device industry are worried that this tax will make it more difficult for medical start-ups to raise capital to launch and expand. Start-ups already face daunting challenges; it typically takes a medical start-up 10 years and $100 million to develop and launch a medical device.
The concern is that the medical device tax could negatively impact financial projections, decreasing the attraction of companies to investors. As a result, start-ups may lose access to financing, which is so critical for covering expenses like manufacturing, facility, sales and marketing. Yet another consequence is of the tax is the hard decisions that some companies may be forced to make because of it – for example, hiring at a slower rate or ceasing hiring efforts for the time being.
It is not only device companies that stand to suffer if health care reform remains intact over the next Presidential term. Some investors have voiced concerns that as the insured population grows and the use of medical products increases with it, insurers will become rigid on prices. Pricing pressure could drive public-market investors away from health care, making it more difficult for start-ups to go public.
All of these issues have the potential to damage medical start-ups, yes. However, it is important to remember that most people who are bold enough to risk starting their own company are already equipped with resilience and creativity. As long as these two characteristics are leveraged well, start-ups will figure out a way to survive and thrive.