ACA’s 2013 medical device tax has already killed jobs, expansion plans

8:00 am by | 6 Comments

The Patient Protection and Affordable Care Act (ACA) includes a new 2.3% tax on the U.S. sale of medical devices beginning in 2013.  The tax was included to raise $20 billion in revenue to partially offset the cost of the new, $1 trillion health program.  The 2.3 percent tax is imposed on revenue, not profits, so that the tax applies to devices regardless if they are sold at a loss.

This particular financing measure is now the target for repeal by a growing number of Members in Congress because of its impact on patient access to life-saving therapies, American jobs, and medical innovation in the United States.

Regardless of how the Supreme Court rules on the ACA, there are many claims about the tax that are inaccurate and do not reflect existing realities about its impact.

Jobs and investment will suffer

Advertisement

Claim: The new tax will not shift employment offshore because the tax does not create an incentive to move production overseas.

Reality: Even without going into effect until 2013, the device excise tax has already caused companies to lay-off workers, grow device manufacturing jobs outside the U.S., reduce investment in research and development, and eliminate capital investment in new U.S. facilities. The device excise tax applies to the sale of medical devices in the U.S.

This is on top of our federal tax rate at 35 percent and state and local taxes.  Combining these U.S. taxes with a slow and cumbersome approval process, the excise tax adds tremendous disincentive to companies wanting to stay in the U.S. and compete in the global marketplace.  Compare Ireland’s tax of 12.5 percent of profit and Canada’s national tax of about 15 percent of profit for most companies to the existing U.S. tax rate of 35 percent that many companies face.

Tack on the new federal tax of 2.3 percent of sales, which equals about a tax of 15 percent on profit for most companies, and U.S. manufacturers in 2013 will pay a tax of about 50 percent for every dollar earned.  Companies operating outside the United States will be at a distinct competitive advantage as those taxes start from a significantly lower base.

It’s disingenuous to say that that level of taxation will not lead companies to locate new factories and research and development arms outside of the U.S.  Foreign manufactures have a clear price advantage by paying a tax bill that can be half what a comparable U.S. firm will pay. Academic claims that the tax will not have an impact on U.S. jobs is naïve and does not match reality.  Medical device companies have signaled a warning for several months now.

Here are just a few examples:

  • Stryker Corporation announced a layoff of 1,000 workers due to the tax
  • Boston Scientific built a $35+ million research and development center in Ireland instead of North America
  • Boston-Scientific is also girding for a $100+ million charge to earnings in 2013
  • Zimmer plans to lay off 450 and take a $50 million charge against earnings
  • Cook Medical has shelved plans to build a medical device factory annually in the U.S.

 No windfall for the device industry

Claim: The ACA will insure millions of people and therefore device companies will benefit from new business through the sale of more devices.

Reality: Reducing the number of uninsured will not increase the number of patients seeking medical devices. Most of our medical technologies are either used today by patients in emergency situations or by elderly patients who are already insured by Medicare.  There will be no windfall for our industry just because more, non-elderly patients have access to insurance.

Here’s why: In the emergency room today, patients receive our technologies regardless of whether they have health insurance or not.  These devices that are used in this setting include drainage catheters, tracheostomy tubes, intubation devices and myriad of other devices to maintain life.  Federal law requires that all patients in need of emergency services be treated regardless of their ability to pay or whether they have health coverage.  The ACA does not change this paradigm.

Further, the administration has stated that the demographic group that will most benefit under the ACA are the non-elderly.  Young people tend not to be in need of stenting or other vascular or organ repairs for aging related conditions.  Most of the patients that use our products are elderly and today they are either treated in the emergency room without regard to health insurance or covered by Medicare that already reimburses hospitals for medical devices.

This analysis is borne out in Massachusetts, which has a similar universal health care approach.  Internal analysis shows that medical device sales did not increase beyond the increase expected prior to enactment of the Massachusetts new health law.

Devastating impact on medical innovation

Claim: Tax will have little effect on medical innovation.

Reality:  The device excise tax will have a real and serious impact on medical innovation in the United States as research, development and manufacturing move overseas as a result of the existing tax and regulatory systems in this country. While the medical technology industry has helped to fuel the U.S. economy in recent years, its position as a global leader may erode over the next decade.

This will no doubt affect: 1) the ability of Americans to access future break-through medical advancements; and, 2) the growth of U.S. jobs.  In the future, China, India and Brazil will experience the strongest gains in developing next-generation products.  Without changes to U.S. policies, gains may lead to an exodus of capital, jobs and research away from the U.S. toward these growing markets.  (Source: “Medical Technology Innovation Scorecard: The Race for Global Leadership,” PwC, January 2011.)

The economics of this highly competitive sector are not static and several policies have driven American medical device companies to seek clinical data and launch new products outside of the United States.  The new, 2.3 percent excise tax on the selling price of a device will leave companies no choice but to reduce research and development and capital investment in the U.S.  It will lead companies to migrate to lower cost tax jurisdictions and tax start-up companies, whether those firms have profits or not.

The new tax will force companies to limit research budgets to test new products and ideas – the lifeblood of growing device companies.  When these resources are curtailed, patients pay the price with more limited medical treatment and a reduced chance of survival.

In addition, the tax will limit capital investment in new facilities. Boston-Scientific projects a $100+ million annual hit to earnings from the tax. Cook estimates it will cost $20 million a year – about what we had planned to invest annually in new factories across the Midwest, factories such as the plant that opened 1n 2010 in Canton, Ill., or the expanded plants opened in 2009 in Spencer, IN.

Wages from those jobs ripple through and strengthen the local community. This new device excise tax will deny patients access to life-saving medical technologies because companies will be forced to move jobs and research facilities overseas.  It is fool-hardy to believe that U.S. companies will be able to compete globally when their competitors do not face the tax and regulatory burdens here in the United States.  We are already seeing the impact of the medical device tax and this is just the beginning if this tax is not repealed.  Americans deserve access to these break-through technologies.

Copyright 2014 MedCity News. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Kem Hawkins

By Kem Hawkins

Kem Hawkins is president of Cook Group Incorporated, and serves as president and CEO of Cook Incorporated and Cook Medical. Kem joined Cook in 1981 as a management trainee. After one year with Cook, Kem was appointed operations manager and in 1983 transferred to William Cook Europe in Denmark. Kem returned to the United States in 1985 as general manager of Cook’s Critical Care unit. In 1988 he was appointed vice president of Critical Care and in 1997 added the responsibility of president of Wilson-Cook Medical Inc. In 1999 Kem was promoted to executive vice president of sales and marketing and was appointed to his current positions in 2001.
More posts by Author

6 comments
John
John

Clearly, the medical device excise tax has garnished a significant amount of attention from lawmakers, industry leaders, and even the FDA. Regardless of it's intent, the reality is that med device companies are beginning to restructure in order to absorb the tax. However, most of this discussion focuses on mass device companies that have the financial means to adapt to the evolving regulatory environment. Check out this recent article from the American Action Forum and stay posted for an in-depth anaylsis on the tax's impact across the small med device industry: http://bit.ly/HW6RmW

J. Collins
J. Collins

Mr. Hawkins makes some compelling points but I think many are disingenuous. The medical device industry has been exporting jobs for decades and will always do so when this benefits their bottom line. Look at the explosion of device companies in Ireland over the last 20 years. The same is now occurring in Costa Rica. It's easy to attribute this to the device tax but the reality is these companies have always exported jobs. He is correct that there will probably be a minimal windfall with respect to the increased number of covered patients. But this does drastically help the system. The uninsured patients he cited were going to get therapy to the detriment of the hospital that had to take the loss. By having these patients covered, ER visits should decrease and the costs to the systems should decrease. As part of the ACA negotiations, all impacted parties (hospitals, physicians, pharma) except the device industry offered concessions to help fund the program. Because they all knew the punitive option would be worse - like a tax on revenue. A great deal of innovation comes from the venture backed start-up environment. These companies are rightfully more concerned about FDA policies since their revenue is usually negligible before being acquired. Innovation in big companies is a function of ROI. They will continue to spend a dollar on R&D if they can get significantly more than a dollar in revenue. With gross margins of 65% - 70%, investment will continue. The reality is companies like Boston Scientific, Cook, J&J, Medtronic, Stryker and Zimmer charge up to twice as much for their devices in the US as they do in the rest of the world (except Japan). Are the device companies gauging the US tax payer? Perhaps the ACA should have requested all devices to be priced at the same price for the best customers in Europe? In an environment where medical device sales reps make up to $500K (rhythm management, spine devices) and device executives make millions a year, there is probably an opportunity to offset at the top. A quick look at Edwards Lifescience shows the top five executives' 2011 compensation was over 3% of revenue. Everyone tells the government to cut the fat. Perhaps the medical device companies can do the same. One question for Mr. Hawkins and his peers: what’s the right answer if the device tax is the wrong answer? We have a broken system and responsible participants and beneficiaries will provide solutions. Pharma, hospitals and physicians have proposed fixes. Where’s the device industries solution?

JBeatty
JBeatty

Hmmmm....I think the remark about executive compensation is partially driving this response.  Yes...they are paid quite well and yes the executives I worked for at Cook Medical work at least 14 hour days, away from home, and most weekends.  Kem Hawkins is anything but disingenuous...and is a straight shooter.  Yes...like any other company out there to make a profit, however, Cook Medical is a very lean, frugal, privately held company without investor capital. They are also a company that does believe the patient comes first...it's a mantra.  A device tax may not be he wrong answer, however, the 35% of corporate taxes paid in addition to the remaining 15% increase is not.  50% tax on products makes me litteraly...sick.  Perhaps lawmakers can help reduce the high corporate taxes of 35% or more to help alleviate the total 50% hit to this industry.  As far as the U.S. markup..it appears the tax rates in many other countries are much lower so they don't have to charge as much to manufacture and distribute product.  After all, if price gouging were a problem, don't you think the government would be all over that one as well.  They do it to the oil companies all of the time and lawmakers are shown over and over again that profit margins are not as perceived.

Joe Hage
Joe Hage

I am launching a site to collect signatures against the medical device tax tomorrow morning at http://no2point3.com and would love to include this article on the site.

Ron Bucher
Ron Bucher

At a recent medical device conference in San Jose, three CEO's of medical device companies (Penumbra, Pivot Medical, and Hourglass Technologies) stated the new tax is not a big problem and not among their top priorities. Boston Scientific's Political Action Committee sends emails to all employees to vote against specific elected officials who voted for the healthcare act. Many BSC top executives have a history of contributing to conservative Republican candidates.

JBeatty
JBeatty

I think this tax is not such a huge problem if your company produces a handful of products.  Cook Medical manufactures over 15,000 products.  So, if you are diverse, you get hit pretty hard.