LIFO Repeal

HDMA’s Position:
The Healthcare Distribution Management Association (HDMA) opposes the repeal of the Last-In, First-Out (LIFO) inventory accounting method. Eliminating the ability to elect the LIFO method would have a grossly disproportionate impact upon pharmaceutical distributors due to their inventories of high-volume, high-value medications. Its repeal would reverse long-standing tax policy and result in an unprecedented tax increase for these companies.

• HDMA member companies distribute nearly 85 percent of all prescription medicines dispensed in the U.S. Repeal of the LIFO election would have a significant impact on their viability and would likely result in an increase in the cost of prescription drugs for Americans.
• According to a 2008 study on tax accounting for the pharmaceutical distribution industry, “Repeal of the LIFO election would increase annual federal income liability within the pharmaceutical distribution industry by 12 times more than the average industry.” This is particularly challenging in an industry that, according to historical aggregated data, has an exceptionally low net profit margin of only .9 percent.
• Repealing LIFO would force companies currently using this accounting method to report their LIFO reserves as income, resulting in a massive retroactive tax increase for companies without a corresponding economic benefit.
• HDMA distributor members use LIFO because it provides a better method to measure financial performance and calculate tax liability as inventory costs continue to rise. LIFO takes into account the greater costs of replacing inventory, thereby giving a more accurate measure of both the financial condition and the taxable income of a business.

Issue:
LIFO has been an established and recognized accounting method in the U.S. since the 1930s and is utilized for tax reporting purposes by a broad spectrum of business sectors that sell a wide range of products. Recently, President Obama proposed elimination of LIFO in his 2011 budget submission to Congress. Elimination of LIFO would be particularly punitive on distributors of high value products such as pharmaceuticals. The repeal of LIFO would increase taxes for distributors in two ways:

• Recapture Tax: This retroactive increase in taxable income is estimated to be the equivalent of 3.6 years of normal corporate tax payments for the pharmaceutical distribution industry, in comparison to an average of one-half year for other industries.
• Ongoing Tax: The annual increase in taxable income liability for the pharmaceutical distribution industry is estimated to be 58 percent, an increase in excess of 12 times more than the average industry.

Distributors Provide Savings to the Healthcare System
Healthcare distributors ensure that more than nine million prescription medicines and healthcare products are safely delivered to more than 165,000 pharmacies, hospitals, nursing homes, physician offices, clinics and others nationwide. With more than 180 distribution facilities across the country, our members provide jobs, significantly contributing to the local economy in which they are located.

HDMA and its members work daily to provide value and contain costs, saving the nation’s healthcare system an estimated $32 billion per year. With a significant increase in taxes, as the LIFO repeal would impose, this savings would be reduced, resulting in higher health care costs. In the current economy, the efficiencies and cost-savings provided by pharmaceutical wholesale distributors are more important than ever. 

About HDMA
HDMA is the national association representing primary healthcare distributors, the vital link in the healthcare system. Each business day, HDMA member companies ensure that more than nine million prescription medicines and healthcare products are safely delivered to more than 165,000 pharmacies, hospitals, nursing homes, physician offices, clinics and others nationwide. HDMA and its members work daily to provide value and contain costs, saving the nation's healthcare system an estimated $32 billion per year.