The unintended consequences of the the Affordable Health Care Act, aka Obamacare, strike again. Seventeen Democratic Senators and one Senator-elect have asked for “a delay in the implementation” of the Obamacare medical device tax, scheduled to take effect on Jan. 1, 2013. The levy imposes a 2.3 percent tax on medical devices, aimed at raising nearly $30 billion over the next decade. In a letter addressed to Senate Majority Leader Harry Reid, the group notes that “the medical technology industry directly employs over 400,000 people in the United States and is responsible for a total of two million high-skilled jobs…In an environment focused on increasing exports, promoting small businesses and growing high-tech manufacturing jobs for the future, we must do all we can to ensure that our country maintains its global leadership position in the medical technology industry and keeps good jobs here at home.” In other words, 18 Democrats are concerned that raising taxes will cause job losses and stifle innovation.
Stephen J. Ubl, president of the Advanced Medical Technology Association (AdvaMed) illuminates the correctness of these Democrats’ newfound wisdom. ”While Washington talks about a fiscal cliff, this tax could push us off an innovation cliff, costing as many as 43,000 jobs and hurting the ability of medical technology companies to find tomorrow’s treatments and cures. It should be repealed,” he said. Dozens of other CEOs have issued similar warnings, contending that the new tax could put some companies completely out of business.
Moreover, the 2.3 percent tax bite is misleading, because it is a tax on gross sales. An industry spokesman with Indiana-based Cook Medical estimated that the impact on a company’s actual earnings would be closer to 15 percent. Cook Medical revealed the consequences of such a bite earlier this year: it announced plans to open five new plants were being shelved.
Furthermore, the tax is being levied on top of what companies pay at the federal, state and local level, pushing many up against an effective tax rate of 50 percent in some states. A new study based on IRS data from AdvaMed, in conjunction with accountancy firm Ernst & Young, reveals the tax could also add another 29 percent to that effective tax rate. This means the total effective tax rate on the profits of some companies could be a staggering 80 percent. Thus, an obvious questions arises: how many companies will be willing to forge ahead, when four-fifths of their profits get confiscated by the feds?
It gets worse. As three CEOs for medical technology companies explain, much of the cutting-edge technology that has transformed the medical landscape comes from small companies with few employees. Many of those companies operate at a loss in the beginning stages of business, when research and development take priority over making a profit. As it stands currently, the 2.3 percent tax is applied to sales, regardless of whether or not a company is making a profit. The CEOs contend that this onerous combination of start-up losses, coupled with the tax, may be the difference between staying in business–or shutting down.
Last summer, when the Republican-controlled House of Representatives voted to repeal the tax, 37 Democrats joined their Republican colleagues in the spirit of compromise that has become the new mantra with respect to fiscal cliff negotiations. Yet the Democratically-controlled Senate has kept the legislation bottled up, and the White House has indicated it would veto the measure regardless. They argue that the provision of Obamacare that forces everyone to buy insurance will increase demand for more medical equipment, in turn boosting device makers’ bottom lines. “Medical device companies are expected to enjoy trillions of dollars in growing sales over the next decade, with profit margins that would make Warren Buffett blush,” a Senate Finance Committee aide told NBC News. “Health reform is providing the medical device industry with 30 million new customers and Medicare is the industry’s largest paying customer. Particularly at a time when we’re all working to cut our debt, there’s no need to single out any industry for a special carve out.”
Eight hundred company executives disagree. In a letter sent to the Senate in November, they specifically addressed that contention, noting that “there is no evidence suggesting a device industry ‘windfall’ from healthcare reform. Unlike other industries that may benefit from expanded coverage, the majority of device-intensive medical procedures are performed on patients that are older and already have private insurance or Medicare coverage. Where states have dramatically extended health coverage, such as in Massachusetts where they added 400,000 new covered lives, there is no evidence of a device ‘windfall.’”
Furthermore, the inflexibility with respect to so-called “carve outs” in the health care bill reeks of hypocrisy. Over 1,200 companies have received waivers for provisions in Obamacare. The majority of those waivers were granted to labor unions. Americans might want to ask themselves whether exempting labor unions, but not medical device companies, from the additional costs associated with the bill makes any sense.
They’d better ask soon. Companies will be expected to pay their first installment of the tax to the federal government by April 30, 2013, for the months of January, February and March. According to rules finalized by the IRS on December 5, the tax will be imposed on medical device equipment “intended for humans,” excluding over-the-counter items such as eyeglasses, contacts and hearing aids, and items “generally purchased by the general public at retail for individual use.” What is included are such items as pacemakers, implanted defibrillators, hip and knee joint replacements, dental implants, as well as MRIs and X-ray machines. Since many of these products are covered by insurance plans, a price increase in the products will likely drive up insurance premiums.
Thus, 18 Democrats are behaving like fiscally responsible conservatives–now. With the exception of Elizabeth Warren, who was not in Congress at the time, every other Senator who signed the letter sent to Harry Reid voted in favor of the healthcare bill. Since the bill was more than 2,000 pages long, it is extremely likely that some of these Senators, if not all of them, did so without reading it.
In a better world, every Democrat in Congress would be required to have the exact same health care coverage–along with the same “unintended consequences”–they have so willingly imposed on the nation. Republicans should be subjected to the bill as well, as a reminder that political ineptitude has a price. If Obamacare is good enough for every other American, such a commitment is a no-brainer.
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