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A hidden tax buried in the bowels
of "Obamacare" threatens thousands of medical-device manufacturer
jobs – and millions of people's health.
We
are unabashed technophiles here. Technology has improved the lives of people
everywhere to an astonishing extent over the past hundred years, and the
future is brighter than even we can imagine. We are also, as you know,
friends of the inventor, the innovator, the entrepreneur – and the free
market in which they get to test their ideas.
There
is little that ingenious men and women cannot accomplish when government
stays out of the way.
As
we have written here and in Casey Extraordinary Technology, the field
of medical devices has been particularly fertile ground, yielding a
mind-boggling array of things that existed only in the realm of science
fiction just a few years back. These are transformative technologies that
have done so much good for so many.
While
the press loves devices of the super-high-tech variety like the da Vinci
surgical robot or Mako's joint-replacement robotic arm (a CET
portfolio pick, mind you, which did very well for our subscribers, more than
doubling their investments from open to close), not all have been so
headline-grabbing. Other, more modest advances also have notably enhanced our
quality of life.
For
one, think of the squirming child who had to hold still for five minutes for
a mercury thermometer to register an accurate temperature. Not to mention the
hazard caused if that thermometer broke and spilled the mercury on the floor
–or worse, into the child's mouth. Under-the-tongue digital
thermometers that work in less than a minute were a big improvement. And
today, how much more convenient and safe it is to have a gadget that can
accurately read body temperature from the eardrum in one second.
Or
consider the leaps forward (pun intended) that have been taken by modern
artificial limbs. They're now so far from their wooden forebears that
recipients can do almost anything the able-bodied can do, including running
competitive races on legs of metal.
With
the perfection of lens transplants, cataracts – once a leading cause of
blindness – can easily be eliminated.
Insulin
pumps have gone from being cumbersome backpacks just a few decades ago to
tiny, 4-oz. boxes that can be clipped to a belt, freeing many diabetics from
the necessity of carrying around syringes and vials of insulin.
Our
subscribers have made a solid return on the innovation of home hemodialysis
machines, which enable renal-care patients to more frequently perform these
critical treatments from the comfort of their own homes – an innovation
which research has shown is more effective in improving quality of care and
extending life than any drug has ever proven to be.
The
list, of course, is endless.
But
there's more as well. Beyond the physical benefits, many medical devices have
also been the basis of outsized profits for investors. Just a few examples:
Intuitive Surgical – inventor of the da Vinci robot – has been a
market darling for the past decade, up 70% in just the last six months and up
4,500% since the beginning of 2003. Implant maker Stryker returned 1,570%
between 1995 and 2007. And pacemaker manufacturer Medtronic rose a staggering
16,000% over a 15-year period.
So,
considering all of the amazing things medical-device inventors and companies
have given us over the years, along with the spectacular amount of wealth
they have created for investors and society, we couldn't help feeling dismay
when we learned that the government is planning to pour cold water all over
further innovation.
Not
overtly, of course. But effectively, to be sure.
How
do you stifle invention and kill job growth? One of the surest ways is to
enact punitive new taxes that single out a particular sector for its success
and put it at a disadvantage to the rest of the market. And that's exactly
what Congress has in store for the medical-device industry.
It
all has to do with the Affordable Care Act, the law popularly dubbed
"Obamacare." When our misrepresentatives were crafting that
massive, convoluted chunk of legislation, they realized that it was going to
be costly and that they had to dream up some fresh sources of revenue to help
fund it. Well, when in doubt, tax somebody; and why not go after someone
who's doing relatively well? The medical-device industry lost only 1.1% of
its employees during 2007-2008, while the manufacturing sector as a whole was
being reduced by 4.8%.
So
into the bill they inserted a new 2.3% tax on medical device companies'
sales. Not profits, mind you – gross revenues. It is basically a
royalty on innovation.
What
this translates to, as a general rule of thumb, is a 15% tax on profits, to
be stacked atop the 35% federal corporate tax (already the world's highest)
and whatever state and local taxes companies might pay. That's a very heavy
burden, and although the tax doesn't kick in until next year, the mere
anticipation of it is already having an effect.
Stryker,
for example, cited the new tax as one of the reasons it is laying off about a
thousand of its workers. Surgical instrument maker Covidien did the same in
announcing that it will shed 200 workers in the US and move production to
Costa Rica and Mexico. Orthopedics giant Zimmer is laying off 450 and taking
a $50 million charge against earnings. Medtronic has said it expects an
annual charge against earnings of $175 million. And so on.
As
bad as these numbers are, an even worse result could be the dampening effect
the law will have on future industry growth. Revenues from the tax are
projected to come in at $20 billion next year. That's nearly double the
industry's budget for R&D. And who can say how many small inventors with
big ideas will have their enthusiasm snuffed out?
"What
on earth could Congress have been thinking?" you might ask. Good
question. Personally, I've long since given up trying to deduce politicians'
rationales from their actions. So here, from a Bloomberg
article by Ramesh Ponnuru, is an explanation of why medical devices
became a target: "The justification for this selectivity was that the
legislation would be a boon for this sector. By expanding health coverage,
the new law would increase demand for medical devices and thus, in effect,
subsidize the industry. The tax was, therefore, a partial clawback of this subsidy."
This
explanation is nonsense, Ponnuru asserts. Stephen L. Ferguson, the chairman
of the board of Cook Group, a privately held medical-device maker based in
Bloomington, Indiana, argued in support: "First, after enacting a
similar law, Massachusetts saw no greater growth in sales than any other
state. Second, a disproportionate number of the newly insured will be young
people with low health risks, thus limiting the potential increase in sales.
Third, in many cases pre-Obamacare law already requires hospitals to provide
medical devices to uninsured people who need them."
This
potential disaster has not gone unnoticed. So far, nine Democrats have joined
216 Republicans in the House to sponsor Minnesota Representative Erik
Paulsen's legislation to repeal this section of the Affordable Care Act. A
companion bill in the Senate has been introduced by Utah's Orrin Hatch, but
as yet no Democrats have crossed over in that chamber.
That
could change. Not only does current Republican Senator Scott Brown of Massachusetts
want a repeal, so does liberal Elizabeth Warren, who's opposing him in the
fall election. Now, it's not likely that Warren has suddenly been hit by a
lightning strike of free-market sense. As a candidate grubbing for votes,
she's acutely aware, as is Brown, that her state's medical-device industry
employs 24,000 people and accounts for 13% of Massachusetts' exports.
Nevertheless,
since the message is often more important than the messenger, Warren did have
this to say: "When Congress taxes the sale of a specific product through
an excise tax … it too often disproportionately impacts the small
companies with the narrowest financial margins and the broadest innovative
potential."
Well
put.
How
this all plays out depends, of course, on whether the Supreme Court strikes
down the entirety of the Affordable Care Act or just the parts it considers
unconstitutional. Before that ruling is handed down, it is likely nothing
will happen. But if the bulk of the law stands, it'll be up to Congress to
rid it of this burdensome new tax. While you never want to bet on politicians
doing the right thing, in this instance they just might. For the sake of
technological advancement, we hope so, anyway.
(Doug
Hornig is not only senior editor at Casey Research, he's a prolific writer
with over 10 book titles and countless articles to his credit. Recently he
wrote an editorial spotlighting
the state of surveillance in the US.)
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