While it seems as though legislative uncertainty is increasingly an issue that the investment community needs to deal with on a year-round basis, at this time of year, many public companies in the healthcare sector are navigating the challenges of a “legislative overhang.”
With tax reform a key focus of President Trump’s legislative agenda, investors are keenly focused on how potential changes in healthcare policy may affect public companies’ growth and profitability profiles going forward. As always, heightened focus from investors means more questions for executive management teams; with legislative uncertainty however, there are no clean answers to these questions. So, what should you do?
We are going to answer that question with a short case study focusing on one part of the current tax reform agenda, the medical device excise tax — the legislative outcome of which will have a tangible impact on the P&L for medical device manufacturers. We hope to illustrate a few key considerations for executive management teams as they develop their own strategy for engaging in any challenging, forward-looking discussions with investors.
Medical Device Excise Tax: Overview and Background
One of the provisions of the Affordable Care Act (ACA) was a new 2.3-percent medical device excise tax (IRC §4191) that manufacturers and importers began to pay on their sales of certain medical devices starting in 2013. Three years later, a moratorium on the medical device excise tax was signed into law; this temporary reprieve from having to pay the 2.3-percent tax is set to expire on December 31, 2017.
Medical device manufacturers are hoping for legislative help to avoid the tax going forward. The prospects for permanent repeal as part of a new piece of legislation would be ideal, but unlikely to happen at this point, which leaves an extension of the reprieve. Specifically, the medical device tax is one of the multiple suggested delays in ACA-related taxes included in a package offered by the House Ways and Means Committee, which would suspend the device tax for a period of five years (2018 to 2022).
The Challenge: J.P. Morgan is Looming, What Are We Going to Say?
Every January, the topic of the year’s growth and profitability expectations is a popular one for healthcare companies. Many companies will be giving 2018 financial guidance in early January, ahead of the J.P. Morgan Healthcare Conference in San Francisco, and even more companies will be leveraging the strong attendance at the conference to meet with members of the investment community while they are in town that week.
Westwicke’s Recommendation: Stick to the Facts … But Prepare for the What-Ifs
Legislative uncertainty presents challenges for public company management teams sharing forward-looking financial commentary and guidance with the investment community. Westwicke recommends that, in times of legislative uncertainty, you should be prepared to share the details that you know. In the case of the medical device tax, the “facts” are known, so quantify the potential impact to your income statement and operating plan if the 2.3-percent tax moratorium expires as planned. Presumably, this is the approach your team has taken in your budgeting discussions with the Board of Directors — use the same approach when communicating the potential financial impacts with the investment community.
More importantly, it is also essential to anticipate and prepare for the most likely “what-if” follow-up questions. In the case of the medical device excise tax, for instance, it is reasonable to expect that you will be asked, “If the tax is in fact repealed, what will you do with that tax that will no longer impact your financial results next year? Will you flow it through to your EPS guidance, or will you invest in other areas of your business to support future growth?”
It is important to have a strategic messaging plan in place to guide your response when the Street asks about areas of your business that may be impacted by pending legislative changes. Management credibility in the eyes of analysts and investors stands to benefit when you’re prepared; not only does it demonstrate your team is strategic/forward-looking, but it also shows that your team understands and appreciates the importance that pricing risks play in the investment process for many institutional investors.
Westwicke can be a valuable resource in helping your management team develop a strategic investor messaging plan in the face of legislative uncertainty. Contact us to hear more about how we can help.