Healthcare / Politics

The Dark Cloud Over the Medical Device Tax

The medical device industry currently consists of 8,000+ manufacturers and employs over 400,000 Americans. Over the last seven months, the industry has been subjected to a 2.3% excise tax on all medical device sales – not only profits. The tax has been a primary funding mechanism for the health care overhaul so far. The medical device industry is one of the few net exporters of goods from the US, and because of its success, was and is continued to be targeted to serve as a “piggy bank” for Obamacare.

To more closely illustrate the effect of this tax, let’s consider the sale of a $1,000 piece of medical equipment by “medical device company X.” The medical device was designed and manufactured for $900. As a company, your profit is $100 before the 2.3% excise tax. After this tax on sales ($1000), the federal government receives $23 dollars and the company is left with $77 dollars in profit.

This corporate tax scheme is intended to generate a total of over $20 billion dollars in revenue to finance health care reform. If you support Obamacare and despise big business, you think this is great…

But it’s not, and here’s why:

The medical device industry is reeling. The tax has generated over $1.7 billion dollars in revenue for the Obama administration to continue its lackluster implementation of the Affordable Care Act (ACA). Currently, more than 8 out of every 10 companies within the industry are small businesses employing less than 50 people. By instituting this tax, the government is disproportionately targeting and impeding the growth of small business in this sector. The Obama Administration is forcing these companies to make tough decisions by cutting profit margins.

To curb the implications of the device tax, several effects are now evident:

Loss of high paying, largely full-time, American jobs: The decreased profit margins are forcing businesses to cut employees in order to curb operating expenses.

Greater industry consolidation: Smaller medical device companies are consolidating to cut manufacturing and R&D costs, resulting in lesser industry competition and likely higher prices for consumers.

Spending cuts in innovative Research and Development: R&D often costs hundreds of millions of dollars for a single medical device. When the ability to recoup those investments is threatened by this tax, it shifts companies’ focus to reducing production costs of existing devices.

Greater focus in cutting manufacturing costs for existing devices: Opportunity for cheaper labor will likely cause more jobs to shift overseas. This is a primary mechanism by which profit margins can be maintained by these businesses.

Consumer Cost Shift: The ACA, in part, was designed to decrease the steep growth rate of health care costs. The tax, at some level, passes its cost onto the consumer. This cost shift becomes another mechanism by which medical device companies can maintain their profitability.

In my mind, all of these negative consequences outweigh the $20 billion revenue the federal government generates as a result of this tax. The House has already authored a bill calling for the repeal of the medical device tax and garnered more than 255 bipartisan co-sponsors. Of course, it is difficult to find $20 billion dollars of funding from alternate sources of revenue. However, suffocating an entire industry, reducing incentives for innovation, and cutting jobs, is simply not a fair price to pay for quick government revenue to fund Obamacare.

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