Medical Device Tax Concerns Overblown

The Orange County Business Council’s Lucy Dunn posted a blog item on the OCBC’s blog expressing concern about the Medical Device Tax that its part of the Affordable HealthCare Act hurting Orange County’s local economy due to the large number of medical device makers here in Orange County.  Dunn’s concerns echo that of any new tax law associated with “ObamaCare” being published on Right Wing news sites.

Dunn writes: Orange County is the medical device capital of the world–from heart valves to stints to tubing to hip replacement parts to nanotechnology–the county is a medical innovation hub of distinction. Orange County is home to state-of-the-art research development firms like Allergan and AMO, preparing for the next generation of health technology. OC residents’ sense of well-being is strong and, excluding obesity, there is a general decline in the leading causes of death.

Under ObamaCare, Congress and the President imposed a new Medical Device Tax that hits entrepreneurial firms making medical equipment such as heart valves and hip replacement parts. These firms now face a tax based upon 2.3% profit on gross sales-a tax they must pay even if they have no profit at all! Many firms report that this tax-projected to be $29 billion over 10 years-will soak up virtually all of their research budgets.

The medical device industry employs more than 400,000 people in 12,000 factories across the country, often small, entrepreneurial firms with a small product line. To survive, they will have no choice but to relocate abroad to avoid this tax and continue their work in research and development of new products-taking much-needed, high-tech jobs with them. The result? Lost jobs, medical device costs increase, higher health care costs, and an economy not as strong as it should be.

The Medical Device Tax only affects companies making products that can’t be directly purchased by consumers.  Last Fall, Republicans tried to suggest that wheelchairs would be taxed and that isn’t true, but the tax would hit companies that make things like pacemakers and artificial joints.  The argument is that 30 million new customers now covered under the Affordable Healthcare Act, the new tax on a companies total revenue would be offset by new sales to new customers.

Dunn maintains the new tax would hurt start up companies in particular, a charge that is refuted by the CEO of a Boston-based medical device startup with 55 employees.

“Bob DeAngelis, an executive with Katahdin, told me that he had no problem with the tax and didn’t see it having much impact on his 150-person firm. “I’m not terribly upset we’re going to have a tax on medical devices. I think it’s overblown,” he said. “Scott Brown says we ‘shouldn’t be taxing the job creators.’ That sounds great but what does that mean. He’s not talking about me. I’m going to hire based on people buying my product.”

Even more outspoken was Michael Boyle, the founder of a 55-person firm outside Boston, SDI Diagnostics. “I’m never in favor of paying more tax if it can be avoided,” he told me. “However, it really infuriates me when politicians say that people won’t hire because they have to pay a tax. If your business is growing and you need people to help sustain the growth you’re going to hire. It’s nothing but political sloganeering to say that a tax like this is a job killer. It’s not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.” He went on: “You bring in millions more people into the health care market and these people are going to use goods and services. My company and every other company, if we operate our business responsibly we are going to share in that. We’re going to give you 10 more in business and take a dollar in taxes, and you mean you won’t hire more people because we’re going to take that one dollar? It makes no sense. It’s nothing but political pandering.”

An editorial last month in Bloomberg further shot holes in Dunn’s argument:

Just about everything the medical-device industry says about the tax is either untrue or exaggerated. Lawmakers shouldn’t be so gullible, even when — perhaps especially when — industry lobbyists produce studies seeming to back their claims.

Sure enough, the Advanced Medical Technology Association, or AdvaMed, financed one such study. It concludes the tax would push manufacturers to move offshore, causing the loss of 43,000 U.S. jobs. An analysis by Bloomberg Government, however, says the study’s assumptions “conflict with economic research, overstate companies’ incentives to move jobs offshore, and ignore the positive effect of new demand” created by the health-care reform law.

The AdvaMed study cites no evidence for the job-loss claim. Even if it is an educated guess, it still makes no sense –unless device makers plan to abandon the world’s most lucrative health-care market. The tax covers all devices sold in the U.S., no matter where they are made. Devices sold outside the U.S. won’t be taxed. The tax, then, creates exactly zero incentive to move jobs offshore.

Then there’s the claim that the levy will be passed to consumers, causing health-care costs to rise and demand for devices to fall. Industry sales will decline by as much as $6.7 billion, the AdvaMed study says. But as any health-care economist will tell you, the medical market doesn’t behave like most other markets. It’s inelastic: When prices go up, demand falls by only a fraction. Mathematica Policy Research has found that only a 2 percent drop in demand results from a 10 percent increase in price. The AdvaMed study, by assuming far higher effects, is off by as much as a factor of 10. 

Health-care reform may have the opposite effect than the industry claims. It extends coverage to 33 million more Americans. Why wouldn’t that lift demand for medical devices? The industry says it won’t because older patients, who buy a disproportionate share of medical devices, are already insured under Medicare. What’s more, the newly covered who were too poor to purchase insurance were being treated already in emergency rooms.

This ignores that the expansion of health coverage will increase the number of elective medical procedures performed on those who were previously uninsured and, in turn, their purchase of medical devices. They might not buy artificial hips; they almost certainly will require tests, scans and outpatient surgery. 

The industry next alleges that the tax will harm innovation as device makers stint on research to pay the levy. This is unlikely. The health-care reform law promotes innovation by calling for more cost-effective ways of delivering care.Analysts at PricewaterhouseCoopers believe that government pressure to shrink health-care costs could force the U.S. and other developed nations to make greater use of technology to achieve better results at lower cost.

Another fallacy is that the tax unfairly singles out the medical-device industry. Not so. Congress designed the law so it wouldn’t add to the budget deficit. To cover those 33 million uninsured Americans, health-care reform taxes the industries that will most benefit: hospitals, home health agencies, clinical labs, insurers, pharmaceutical companies and, yes, medical-device makers.

The industry’s last refuge is a claim that the tax will hurt small businesses. On close examination, this doesn’t ring true, either. A handful of large companies accounts for most of the industry’s revenue. The 10 largest medical device makers probably account for 86 percent of sales and therefore will pay 86 percent of the tax.

Repealing the tax would cost almost $30 billion over 10 years and undermine the implicit bargain in the law: In exchange for millions of new customers, health-care companies agreed to fund the cost. Repeal would open the gates to other health sectors seeking to renege on that deal.

The lawmakers most actively pushing repeal are also the ones who are most dependent on the industry’s campaign contributions. They come from California, Indiana,Massachusetts, Minnesota, Pennsylvania and Utah — the states where the device industry has the largest presence. 

Since its passage, the Affordable Healthcare Act has had a bullseye on the legislation from Republicans and anti-tax business groups.  Dunn is representing OC business interests seeking to pay as little in taxes as possible.  But the notion the medical device industry will wholesale pack up and move offshore strikes us as unrealistic.


  8 comments for “Medical Device Tax Concerns Overblown

  1. February 15, 2013 at 8:40 pm

    Only the profits of Medical Device Companies should be taxed. Most Medical Device companies take years before they show a profit. They depend on charitable contributions from Foundations and they also depend on charitable wealthy investors who understand that they might lose their entire investment. When the sales of a yet unprofitable Medical Device Companies are taxed it becomes more difficult to raise the capital to stay in business. Medical Device Companies must eventually show a profit. It’s a “Crime against Humanity” to tax the per-profitability sales.

    We’re not talking about refrigerators or automobile tires, – this is about Medical Devices that can save lives or at least reduce suffering. They should receive a favorable tax treatment.

    If the Medical Device Company goes out of business then obviously there will be no new sales.

    If I were the president of the Swiss Chamber of Commerce, for example, I would recruit Medical Device Companies to relocate. I would offer no taxes on sales until profitability and free rent. I would stipulate that the Medical Device be manufactured locally and first sold to Swiss hospitals and then in the European Union.

  2. February 16, 2013 at 11:17 am

    The government should be offering incentives, not adding taxes to businesses, who want to grow or who are marketing new products especially medical devices. There is no question Obamacare which liberals love, will have a disasterous effect on the economy, patients and medical providers.

    By the way, I am not a Republican, a businessman, nor a right-winger.

  3. oc guy
    February 16, 2013 at 7:10 pm

    @Robert Lauten
    Your “Swiss” story has such big holes to drive a truck through.
    1st, if you want to avoid taxes, you don’t go to any part of Western Europe.You will find everything you guys hate their, including unions, workers who get 6 weeks of paid vacations and universal healthcare.

    2nd, If you want to abandon the most lucrative market in the world (the USA) then I question your business model. No matter where the product is made, you still have to pay the tax if you sale it in the USA.

  4. Kyle
    March 12, 2013 at 5:06 pm

    To the Author: You’ve got no clue how taxes are passed down do you. Consumers can’t directly purchase the devices, but you do realize how insurance and provider rates work right? The manufacturer gets taxed (20 billion over 10 years to the industry), they raise the price of the product to make up for the loss, the providers purchase the product at a higher price, they then have raise their rates on insurers, which then have to raise their rates on consumers. It’s simple, this tax will be detrimental to rates for consumers, as well as the industry themselves. They now have less incentive to make expensive, life-saving devices. They cut jobs to make up for the tax. They become less innovative overall. We all suffer.

  5. March 12, 2013 at 7:43 pm

    Kyle. – you are forgetting the millions of new customers Obamacare brings to the table. Please refute the comments of the mead tech CEO from Boston

  6. Kyle
    March 13, 2013 at 7:09 am

    Dan-One CEOs opinion, especially a 55 person start-up which doesn’t have a whole lot of time in the market, doesn’t convince me otherwise. He doesn’t have evidence, he’s just offering his opinion that it won’t hurt him or his company that much. There’s no real evidence. Now you could say the same about the folks that are against it too, because it hasn’t really hit yet, but in the next few years I predict that you will see major effects from this tax, and the numerous other taxes enacted in PPACA.

    Kevin Lobo, president and CEO of Kalamazoo, Mich.-based medical device company Stryker, said the company is “significantly concerned” about the tax.

    “Stryker expects to owe approximately $100 million in the first year alone, equating to over 20 percent of our annual, global R&D investments,” said Lobo, noting that the money would be better spent on job creation, innovation and clinical research.

    Bruce Carlson, publisher at New York City-based healthcare market research firm Kalorama Information said that the tax is especially difficult for medical device companies because it is on revenues rather than profits.

    “No company in any industry would like to hear that as of tomorrow their sales will be cut 2.3 percent, which is one way to look at what’s happening,” said Carlson. “Companies and investors expect growth each year. (This) tax reduces income, detracts from earnings and might be a negative factor for investors in the stock market otherwise looking at device companies.”

    I just don’t understand why they need to attack the innovators and job creators with new taxes. This is why we are seeing the larger companies moving most of their production over seas, to avoid the heavy tax burden. You can’t tell me this doesn’t take away from jobs and increase price. This is one tax of many inside PPACA that will ultimately hurt the economy and healthcare in general. As for the millions of new people coming in, there are also millions going out because they will no longer be able to afford it, their employer is dropping coverage and they would rather pay the small fine than a huge premium each month. The vast amount of information and evidence points to a complete fiscal mess in the next few years with quality of care being compromised.

  7. Dan Chmielewski
    March 13, 2013 at 10:22 am

    Kyle –did you read the excerpts from the Bloomberg story? An industry that’s about tho get a lot more new customers because of new legislation ought to pay its fair share of taxes.

  8. Kyle
    March 13, 2013 at 11:35 am

    Dan–I did read that exerpt…So what you’re saying is the new customer load will cause an increase in demand and offset the losses from the taxes, I get it, I just don’t think this is what’s going to happen. I’m more focused on the effects on the consumers above all. So let’s say the manufacturers don’t have to cut jobs at all, they still are going to raise their prices year one and probably year two because there is no guarantee that the predicted number of people will actually get insurance. The penalty for not having it is $95 year one, $295 year two, which is pennies compared to the cost of insurance, even with a subsidy, which by the way are not going to be huge for anyone about 250% FPL. The only people who will get a nice subsidy will be 133-220% FPL, and the older the enrollee, the greater. Throw in the people who are getting kicked off of their insurance plan because their employers are dropping coverage, which has been evident will happen, and the number of new customers is not as high as predicted at all. Their is great uncertainty for what’s actually going to occur in these next few years, but one thing is for sure is that these taxes are going into effect. So any smart manufacturer will prepare for this hit with a price increase. There has been zero evidence of prices decreasing under PPACA, only massive increases. This trickles down to the providers, then insurers, then consumers.

    I hope you’re right, but I don’t believe this will be the case.

    The “fair share” statement has got to stop though. Top 20% pay 77% of the nation’s tax revs. These companies want out of US because of increases in taxes, they pay more than their fair share.

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