ObamaCare's Medical Device Tax Will Cost Innovation and Jobs

An artificial pacemaker with electrode. (Photo credit: Wikipedia)

Medical devices are something of an orphan sister to the glamour of drugs, but they include some of the genuine miracles of modern medicine: pacemakers, artificial joints, cardiac stents, scanners, and radiotherapy machines. The United States currently is the global leader in medical device innovation, and it is one of the few major industries that both boasts a net trade surplus and is a job-creator. The sector employs 400,000 Americans directly and is indirectly responsible for almost 2 million more that supply and support the highly-skilled workforce.  Most important, its products are essential elements of modern medical care, including everything from CT scanners and pacemakers to blood pressure cuffs and robots used by surgeons.

But all of that is in jeopardy.  The medical device industry is being ravaged by unwise public policy, including a devastating 2.3% excise tax scheduled to go into effect on Jan 1 as part of ObamaCare.  This tax is especially pernicious because it is assessed on sales, not profits. To put this in perspective, imagine that you’re a manufacturer of medical devices and had a profit of $100,000 on sales of $1 million after all your costs and expenses—everything from materials and labor to research. The excise tax would be $23,000, wiping out almost a quarter of your profits.

Many medical device companies have to ramp up sales before they become profitable. Due to the long, draconian and sometimes unpredictable regulatory process that must be negotiated before a product can be sold, it can take from $70 million to $100 million in total sales before these businesses make their first cent of profits. Nevertheless, they would have to pay the excise tax on their revenue.

The nation’s medical device industry is vulnerable. It is not comprised of behemoths: 80% of its companies have 50 or fewer employees, the very businesses we are relying on to turn the U.S. economy around. The new excise tax comes when regulatory delays and uncertainty are increasing, and as many device firms are shutting down or moving abroad to take advantage of the more favorable tax and regulatory climate in Europe. The tax will force companies to lay off employees, cut back on research and development, or diminish capital investment.

Anticipating the excise tax, numerous companies already have announced layoffs or withheld investments. Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases. Even if the market would tolerate that—which is surely questionable given the current pressure to drive down costs—it would, ironically, raise the costs of medical care. That was not supposed to be an outcome of ObamaCare.

Rep. Erik Paulsen (R-MN), the acting chairman of the House Ways and Means subcommittee on human resources, has been nothing short of heroic in trying to rally support to repeal or delay the tax.  He spearheaded a repeal bill through the House in June and has been encouraging members of the Senate from both sides of the aisle to follow suit.

Predictably, from his perch in a parallel universe, President Obama has been recalcitrant.  “It’s going to be great for business, and they’re doing really well right now,” the president said. “This additional tax essentially comes back to them as new customers.”

Rubbish.

Rep. Paulsen dismissed the president’s prediction of a supposed “windfall’ to the industry a “convenient myth.”  “In reality, utilization of medical devices is heavily tipped towards America’s aging population,” he said. “Medicare beneficiaries, both elderly and disabled, are disproportionally large users of medical devices and already have coverage through that program. Similar state level reforms in Massachusetts have not resulted in more revenues for medical device innovators.”

The U.S. remains the global leader in medical device development and manufacturing, although reports from PricewaterhouseCoopers and others show that even without the excise tax its lead is tenuous, in part due to regulatory uncertainties and dysfunction that thwart innovation.

We need to create a more nurturing entrepreneurial climate, one in which ingenuity and innovation are rewarded, not penalized.  We’re getting the opposite.

Henry I. Miller is the Robert Wesson fellow in scientific philosophy and public policy at Stanford University’s Hoover Institution. A physician, he was the founding director of the Office of Biotechnology at the FDA.