The new medical device excise tax is putting a strain on an industry that’s already suffering from declining margins and increased competition. The new legislation requires tax payments; however, the law doesn’t define how to capture the required tax. To further complicate matters, not all transactions are taxable. With the ambiguity in the law and the requirement that taxes are paid monthly, companies must hire analysts to run reports to determine the taxing conundrum. Another alternative is to pull other employees from their work to ensure the proper tax is paid. The man-hours required to run the analysis on millions of dollars in sales can run into the hundreds per month – and what’s worse is that after all the work, the result is just a “best guess.”
Excluding the additional time it takes to run the analysis, a company that makes 60% margin on a sale must now increase price by 2.354% to offset the 2.3% tax. This may not sound like a lot; however, when you calculate an average revenue of $100 million per month, that translates to $2.354 million companies must try to recoup.
Determining the right amount to pay is paramount in this situation. Price increases are difficult to come by, and you don’t want to overpay the tax. Companies can simply take a 2.3% tax calculation on every transaction that is sold, but that would cause overpayment because not each transaction is taxable. Another route is to take a percentage – say 80% of 2.3% times all your transactional revenues. This could get a company close to the right price from which to base the tax payments; however overpaying or underpaying is still a likely possibility. No company wants to pay too much or worse, pay too little, and have the government come calling for their money with penalties. Ideally a customer can apply filters to every transaction and flag them as “taxable” transactions or not. However, this is time consuming, and the rules can change.
So what’s the answer? The best bet is to use a tax dashboard. Using big data analytics, a finance group can run powerful reports that provide them with high-confidence estimates to ensure they pay enough without overpaying. By creating a dashboard, analysts can look at the average sale price of a device, as well as the unit invoice price, to gather the lowest unit price. They can use this information as is, or they can run deeper analysis using a box plot to simulate a price curve.
A box plot determines the minimum, max, average and quartiles of pricing that occur in a stated time frame. In the case of medical tax, an analyst would run this once a month. The customer can choose the minimum with or without outliers. Typically ignoring outliers is advised such that the “typical” lowest price is identified and can be used to calculate the appropriate tax. With this dashboard, a minimum price – excluding outliers – can be used with a simple calculated measure to bring in the best estimate for tax payments.
With this powerful information at the fingertips of analysts, reports using an organization’s own big data can be run and analyzed within minutes for the entire company portfolio. This frees up valuable resources for other activities, and lessons the impact of an already burdensome task. Take the guesswork out of prices and optimize your sales with prescriptive analytics and big data. It’s just what the doctor ordered.
Click here to learn more about how PROS and big data can nurse your sales back to health.
Matt will be attending Q1 Productions Medical Device Strategic Pricing Conference on September 16-17 in Chicago. If you’re attending and want to connect with Matt to discuss pricing challenges in the medical device industry, email him at mmcclung@pros.com.
Post written by Matt McClung
