3 minute read 26 Apr 2018
healthcare professional writes complex details white board

How to respond when tax changes have unintended consequences

By

EY Global

Multidisciplinary professional services organization

3 minute read 26 Apr 2018
Related topics Tax Health Trust

When tax policies change, organizations must adapt. But when the changes are complex and far-reaching, how should industry respond?

When the unintended repercussions of tax or regulatory changes outweigh the benefits, regulators may not have fully anticipated the consequences. How should industry representatives respond?

Often, the best response is to open a dialogue. This was the case with a recent reform to how healthcare was taxed in Slovakia. In this case, industry representatives sought external support in order to facilitate a constructive conversation with government and regulators. The result was to avoid a change which would have impacted spending on pharmaceutical research and development and the long-term pursuit of better drugs and healthcare. 

The over-prescription challenge

In 2014, there was strong indication that doctors in the Slovakian healthcare system were prescribing too many drugs. As the drugs were paid for through national health insurance, this over-prescription was not just wasteful, it was also placing increasing pressure on the public finances.

The result was that the country faced one of the highest expenditures on pharmaceuticals as a share of GDP in the OECD. But previous attempts to get costs down – such as rules on how doctors and pharmaceutical sales teams could engage, and price controls – had not worked.

The tax remedy

In response, the Slovak government resolved to introduce an industry-wide pharmaceutical withholding tax, which would have introduced a 19% tax on any transaction between the pharmaceuticals industry and doctors. The aim was both to dissuade doctors from overprescribing medicines and to provide the government with a new source of revenue.

However, this new tax was both complex and indiscriminate. Rather than just impacting transactions involving medicines, it covered all transactions. Left in place, this could have had many unintended consequences. 

A female scientist examines yellow petri dishes on a glass table

The unintended consequences

The effect on clinical trials soon became a core concern for Slovakia’s Association of Innovative Pharmaceutical Industry. Richard Panek, Tax Partner, Ernst & Young, s.r.o., explains: “In some areas the tax made sense, but in others it had serious unintended consequences – in particular in the field of clinical trials. As a tax on gross revenue, it took no account of the costs of clinical trials, such as blood tests and lab work. Implementing it would have caused major cash-flow problems for doctors – and ultimately stopped the trials.

“The effects would have been serious for patients – who would no longer have access to experimental and potentially life-saving drugs – and also for the industry, diverting some €30m R&D spend annually to other countries.” 

Communication was the best medicine

Slovakia’s Association of Innovative Pharmaceutical Industry reached out to EY for help. The first step was to create a working group to bring the industry association and government together in an open and inclusive way, and to help both parties work together to understand the issues and develop a solution.

The team developed case studies and conducted detailed technical tax research to illustrate what would happen to clinical trials in the country if the tax went ahead as planned. This led to a new approach which offered several important exceptions to the new tax ruling, including for clinical trials. The R&D spend, the jobs of healthcare professionals and researchers, and access to potentially life-saving drugs were preserved.

“Public health policy, funding, regulation and taxation is one of the most delicate ecosystems in terms of government-industry relations,” Panek says. “But even here, the Slovakian example shows that when tax or regulatory changes have complex and unintended consequences, the best approach is to facilitate a conversation with the regulators in order to find a solution suitable to all.”

Summary

Open conversation between government and industry can help avoid unintended consequences from regulation.

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By

EY Global

Multidisciplinary professional services organization

Related topics Tax Health Trust