Starting January 1, medical-device makers must pay a new 2.3% excise tax on sales, regardless if they make a profit, to raise $30 billion over the next decade to pay for health reform.
FOX Business has obtained a letter sent this month to the Senate from executives at more than 800 companies and medical groups demanding the tax be repealed as part of the fiscal cliff deal.
House Majority Leader Eric Cantor (R-Virginia) told FOX News that the 2.3% device tax should be part of the fiscal cliff deal, along with the health-reform law.
Already technology companies are announcing job cuts, reductions in R&D budgets and are canceling plans to build plants to pay for the tax. One study from trade association AdvaMed forecasts a huge 43,000 jobs lost due to the new tax. And it's the little guy who will get hit hardest, since many of the novel, cutting-edge medical technology innovations come from small companies with few employees.
The medical-device tax is among the nearly two dozen new or higher taxes in the Affordable Care Act that seek to raise tens of billions of dollars to pay for health reform. The medical-device tax has been roundly criticized as putting life-saving medical devices in the same tax category as alcohol or cigarettes.
Companies that make life-saving medical devices typically operate on thin profit margins. The new excise tax, which was initially intended to raise $20 billion but now $30 billion, can easily shove them into the red. They must pay the 2.3 % tax even if they post losses.
Why push into bankruptcy the companies that are creating bold, new life-saving inventions to ensure, say, safer heart or liver transplants, stop brain aneurysms, deliver hip replacements, stents or prosthetics (needed by our returning soldiers)?
The tax is slapped on top of what companies already pay at the federal, state and local level, for an effective tax rate bumping up against 50% in many states.
A new study based on IRS data from AdvaMed in conjunction with accountancy Ernst & Young finds the new medical-device tax could easily lard on another 29% to the effective tax rate.
Executives are now saying, why bother running a company if the government is going to take 80% of your profits?
The House of Representatives voted to repeal the tax last summer, with 37 Democrats joining. The idea is to pay for it with clawbacks of government subsidies in new state health exchanges. However, repeal has stalled in the Democrat-led Senate. The Obama administration has already said it would veto the repeal bill. Democrats argue the industry will get more sales anyway once the law forces everyone to buy insurance.
“A dramatic tax increase on a job-creating industry like medical technology makes no sense,” said Stephen J. Ubl, president and CEO of AdvaMed in a statement. “A tax bill this big will only lead to fewer jobs, reduced investment in tomorrow’s treatments and cures, or higher health care costs for the consumer.”
Zimmer Holdings has already moved to lay off 450 workers due to the tax. Stryker Corp. has let go 1,000 employees. Other companies such as Medtronic expect to pay an estimated $40 million to $60 million next year in medical-device taxes. “We’re going to have to make the tradeoffs and there’s probably going to be things that we can’t do as a result of that,” Medtronic CFO Gary Ellis told investors earlier this year. “It means we won’t have as much to invest going forward.”
The letter writers to the Senate include companies such Abiomed (ABMD), Allergan (AGN), Baxter Healthcare (BAX), Biomet, C.R. Bard (BCR), GE Healthcare, Sanofi (SNY) and St. Jude Medical, as well as groups including the American Association of Neurological Surgeons and American Academy of Pediatric Dentistry. They sent the letter to Democratic majority leader Senator Harry Reid, Republican minority leader Senator Mitch McConnell, as well as Senators Richard Durbin and Jon Kyl.
The companies and groups note that the medical device industry is a powerful job creator. It employs more than 400,000 workers nationwide, delivers about “$25 billion in payroll;” pays “salaries that are 40% more than the national average” and “invests nearly $10 billion in research and development annually.” The industry is fueled by innovative companies, the majority of which are small businesses with 80% of companies having fewer than 50 employees and 98% with fewer than 500 employees.
AdvaMed CEO Ubl adds: “At a time when there is bipartisan agreement that the U.S. tax system needs to be more competitive, the device tax takes us in exactly the wrong direction. The device tax no longer has anything to do with the debate over the Affordable Care Act; the issue now is whether our tax system is going to support or undermine America’s ability to compete in the global economy.”
Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.