Evan Bayh, former Democratic senator from Indiana, writes about the destructive nature of ObamaCare’s tax on medical devices.
The Supreme Court decision in June upholding the Affordable Care Act leaves in place a tax on medical devices that threatens thousands of American jobs and our global competitiveness. It will also stifle critical medical innovation in the industry that gave us defibrillators, pacemakers, artificial joints, stents, chemotherapy delivery systems and almost every device we depend on to save lives.
The 2.3% tax will be charged to manufacturers on each sale and takes effect in January. Many U.S. device companies, in response, have already announced layoffs, canceled plans for domestic expansion and slashed research-and-development budgets. This month, Welch Allynâ€”a maker of stethoscopes and blood-pressure cuffsâ€”announced that it will lay off 10% of its global workforce over the next three years, but all of the jobs being cut are in the U.S.
Given the fragile state of the U.S. economy, Congress must move quickly to redress the harm from this tax before it becomes irreversible.
The medical-device industry has been a great American success story. More than 400,000 U.S. workers are employed in this sector directly, and another two million, including those involved in supply and distribution, benefit indirectly. At a time when the economy struggles to produce good jobs, medical-device positions pay well. Average compensation is $58,188 annually compared with a national average of $41,673 annually for all employment, a 2010 Pew Foundation report found.
While the U.S. overall imports far more products than it exports, America is a global leader in medical-device production and sales. Last year the U.S. device industry earned $5.4 billion more in exports than we spent on imports of such devices.
Even more important to the average American is the industry’s role in saving and sustaining life. Medical devices have contributed to remarkable advances in numerous areas: artificial hips and knees, and devices used in the treatment of cancer, and for angioplasty, vascular surgery and in-vitro fertilization, to name a few. Many of these devices have not only improved the quality of life for patients, but also produced health-care cost savingsâ€”for instance, each time an angioplastic balloon made open-heart surgery unnecessary.
All of this is now threatened by the only law that is guaranteed to pass in Washington: the law of unintended consequences.
A 2.3% tax on medical-device sales, not profits, was imposed under the theory that sales to medical-device companies would surge after patients newly insured by the Affordable Care Act poured into the system. What the industry lost in margins, it was supposed to make up in greater volume.
That calculation ignored the fact that the vast majority of medical-device consumers already are covered by Medicare, Medicaid or private insurance. So there will be little or no increase in sales volume to offset the added cost of $30 billionâ€”according to the Congressional Budget Officeâ€”to the industry. This tax comes straight out of a company’s bottom line. Because many devices are sold to hospitals, physicians and other providers through multiyear contracts, the prices are already locked in, so the tax cannot be passed on to the buyer.
The hit will be severe. For a typical company, a 2.3% tax on revenues equals a 15% tax on profits. When combined with a 35% corporate tax and state corporate taxes, the tax rate for the medical-device industry will exceed 50% in most jurisdictions. Many marginally profitable businesses will then hemorrhage red ink, since they’ll have to pay the excise tax whether they are making money or not.
Especially hard hit could be the hundreds of small companies developing medical software applications. These apps promise to revolutionize the practice of medicineâ€”for instance, by delivering blood-sugar test results for diabetics. The IRS is deciding now whether to treat apps as medical devices subject to the tax.
The adverse effect of this confiscatory level of taxation on traditional device makers is already clear. In my state of Indiana alone, Cook Medical has canceled plans to build one new U.S. facility annually in each of the next several years, and Zimmer plans to lay off 450 workers, while Hill-Rom expects to lay off 200. Stryker, based in Michigan, anticipates having to lay off 1,000 workers.
As a result of the looming device tax, production is moving overseas, good jobs are going to Europe and Asia, and cutting-edge medical devices will now be produced elsewhere for import into the U.S.
Meanwhile, the impact on the quality of care is incalculable but no less real. Thirty billion dollars must be taken out of operations or R&D. Who knows what lifesaving devices that might have been developed will fall victim to this tax?
If Congress acts soon, however, most of the harm can be forestalled. There is hope. The Houseâ€”233 Republicans, joined by 37 Democratsâ€”voted in June to repeal the tax. In the Senate, 33 Republicans are on record in support of doing the same. While no Democrat has stepped up to co-sponsor the legislation, several speak favorably in private. Even Elizabeth Warren, the Democratic Senate candidate from Massachusetts and a staunch progressive, has now come out in favor of repeal.
At a time when creating jobs, fostering innovation and competing globally are the pre-eminent challenges facing America, surely consensus can be reached to undo a provision that makes all three that much harder. As a Chinese proverb says: It is better that wisdom comes late than not at all.