Jan. 3 (Bloomberg) -- A year from now, the federal government will start collecting a new tax on medical devices from tongue depressors to imaging machines, thanks to the sweeping health-care overhaul that Democrats enacted in the spring of 2010. People in the industry say it’s already having an effect.
In November, citing the new tax, Stryker Corp., whose products include artificial hips and knees, announced that it would let go about 1,000 of its workers. Earlier last year, Covidien Plc, maker of surgical instruments, said it would lay off 200 workers in the U.S. and move production to Costa Rica and Mexico. It, too, cited the tax.
Other companies in the field have announced similar measures -- or plans to expand production overseas but not in the U.S. -- without mentioning the tax. The sluggish economy is clearly part of the explanation, but the medical-devices industry had been a relative bright spot within U.S. manufacturing, losing only 1.1 percent of its employees during 2007-2008 while manufacturing as a whole lost 4.8 percent. A study done for AdvaMed, a trade association for the industry, claims the tax could ultimately cost more than 45,000 jobs.
Medical-device companies employ more than 400,000 Americans. Their wages are higher than the national average. The U.S. is a net exporter of medical devices.
The tax will change these numbers for the worse. It will be levied at 2.3 percent of sales; on average, profits make up less than 4 percent of sales in the industry. The AdvaMed study concludes, “The new 2.3 percent excise tax will roughly double their total tax bill and raise the average effective corporate income tax rate to one of the highest effective tax rates faced by any industry in the world.”
Raising Health Costs
Richard S. Foster, the Medicare chief actuary, has estimated that if the tax is passed on to consumers it will raise national-health costs by $18.2 billion in 2018. Device makers complain that the tax will lead not only to higher prices and layoffs but also to reduced research and development. They also say that when combined with high U.S. corporate-tax rates, the device levy makes relocation to other countries more appealing. Ireland, for one, is actively recruiting medical-device makers to move production there.
The main reason Congress included the tax in the health-care legislation was, of course, to raise money. Democrats wanted the Congressional Budget Office to certify that the bill would reduce the deficit overall. But why go after one industry in particular? 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.
Stephen L. Ferguson, the chairman of the board of Cook Group, a medical-device maker based in Bloomington, Indiana, makes three counterarguments: 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.
“So it doesn’t increase the number of devices sold,” Ferguson says.
Asked if Cook Group will respond to the tax by reducing its workforce, Ferguson spoke carefully.
“You don’t want to say to your workforce that you’re going to lay people off,” he says. “The tax is going to result in growth in another location and not in the U.S.; that’s the way I see the impact on Cook.”
Cook Group is privately held; Ferguson says publicly held companies will face more pressure to reduce workforce numbers to placate shareholders, but will be more reluctant to blame the tax in public.
Even some liberal pundits, such as MSNBC host Ed Schultz, have expressed opposition to the device tax, and nine Democrats have joined 216 Republicans in the House to sponsor Minnesota Representative Erik Paulsen’s legislation to repeal it. A companion bill in the Senate introduced by Orrin Hatch has 19 co-sponsors, all Republicans.
Paulsen is hopeful that more Democrats will reconsider the tax: “Most of those nine have come along in recent months as their constituent companies have alerted them to the danger. It starts in literally one year. So we have time to fix this.” Right now, though, the tax is caught up in the politics of the larger health-care bill. Most Democrats do not want to undermine the new law, and most Republicans want to repeal it outright rather than remove its most objectionable features.
The Republican worries are especially misplaced. The device tax has motivated very little of the popular or congressional opposition to the health-care law. If Republicans succeed in eliminating the levy, that opposition will remain just as strong as before. If they fail, then at least their condemnation of the tax can help make the case that the law was even more misbegotten than opponents thought.
(Ramesh Ponnuru is a Bloomberg View columnist and a senior editor at National Review. The opinions expressed are his own.)
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