(A similar version of this Health Alert appeared at Forbes.)
Why does the medical-device excise tax still exist? This tax is a universally reviled Obamacare revenue-raiser. It levies a 2.3 percent excise tax on the sales of medical devices of all shapes and sizes — from the smallest artificial-heart valve to room-sized imaging machines. Outside liquor and tobacco sales, most Americans don’t see excise taxes, which are levied on gross sales, irrespective of a company’s profitability. Repealing the excise tax has wide bipartisan support in both chambers of Congress. Obamacare champions — including Representative Nancy Pelosi and Senator Al Franken, both of whom voted to impose the tax when they voted for Obamacare — have manned the ramparts for repeal. The tax was first levied in January 2013.
Hoping to see it repealed before the first dollar was collected, scholars produced impressive research in 2011 and 2012, anticipating significant job losses due to the tax’s effects on device-makers’ ability to compete. In 2011, Diana Furchtgott-Roth and Harold Furchtgott-Roth published a study concluding that the tax would cost 43,000 American jobs. Similarly, Michael Ramlet and Robert Book of the American Action Forum wrote an analysis in 2012, which predicted job losses of at least 14,500 and up to 47,100. In a report for the trade association AdvaMed, Ernst & Young concluded that the excise tax would add 29 percent of companies’ U.S. corporate income taxes. (At the time, I was Vice-President of research at AdvaMed.)
Devon Herrick of the National Center for Policy Analysis published research explaining that most medical-device firms in the U.S. are relatively small. 95 percent of U.S. headquartered firms have sales less than $100 million and focus on domestic rather than international sales. It is more difficult for these small companies to avoid that tax by focusing on exports. Herrick also concluded that the excise tax doubled the effective corporate tax burden. However, since the device tax took effect in 2013, there has been a dearth of new research confirming these effects. On the theory that the tax’s impact would first show up in U.S. versus international sales, I wrote an article in Forbes in September 2013 showing that U.S. sales were suffering versus international sales. Well, the tax has been in effect for over a year and a half now, and its negative effect on U.S. sales of medical devices appears to persist. As in my previous Forbes article, I focus my analysis on the largest manufacturers. Of the ten largest medical-device companies, as defined by the online trade publication Medical Device & Diagnostic Industry, it is possible to discover relevant information from eight of them. They all indicate that U.S. sales are flagging, relative to international markets.
- Johnson & Johnson’s medical device and diagnostic sales were down 1.5 percent in the U.S., versus up 1.8 percent internationally, in the first half of 2014.
- Siemens reported that healthcare orders were down in the Americas for the first nine months of 2014.
- General Electric reported that the U.S. healthcare market continues to be “challenging,” and sales shrank by 2 percent in the second quarter, versus up 2 percent in Europe.
- Medtronic’s U.S. sales for the 2014 fiscal year were up 1.7 percent, versus 5.9 percent internationally.
- For Baxter, U.S. sales of medical products were down 15 percent for the quarter ended June 2014 in the U.S., versus up 8 percent globally.
- Fresenius’ U.S. sales of dialysis products were down 1.2 percent in the first half of 2014, versus up 0.6 percent internationally.
- Philips’ report for the first half of 2014 states that: “comparable sales in Western Europe were flat and other mature geographies showed low single digit growth, while North America recorded a low single-digit decline.”
- Covidien does not clearly segment U.S. sales from international sales in its report. Nevertheless, during the nine months ending in June 2014, Covidien’s excise-tax liability was $47 million. For the same nine months ending in June 2013, it was only $30 million.
So, the business environment in the U.S. continues to deteriorate, versus international markets. And these are the largest, global medical-device manufacturers, which can more easily overcome U.S. weakness by beefing up international sales. Smaller, domestic competitors are surely struggling harder. And yet the medical-device excise
tax is still with us, skimming 2.3 percent off the top of every sale of a medical device in the U.S. — although almost everyone says they want to repeal it. What can be done to move the repeal along? I have two suggestions: First, new research is needed to confirm the job losses and other negative consequences anticipated in the previously published research. Second, the industry has recoiled from suggesting a “pay for” to replace the revenue lost to the government if the tax is repealed. Finding a “pay for” is an important step for legislative success. Time is not on the side of repeal. The longer the tax persists, the longer it is likely to continue. Protecting American jobs and medical innovation demands a new approach.