The Affordable Care Act and the future of the Medical Device Industry

This article was originally published on October 31, 2012 at the OBR Roundtable Review.
 
The United States has the world’s largest medical device industry, with an estimated worth of $105.8 billion dollars in 2011. US companies are pioneering medical device innovation and creation worldwide and are responsible for the direct employment of ~ 400,000 workers. The continued success and growth of the medical technology sector will have a significant impact on the nation’s economic progress out of the current recession. It will also directly affect the accessibility of affordable and necessary medical care for individuals across the country. Representatives from the medical device industry as well as both Democratic and Republican politicians claim that the future of the lucrative and world-leading biomedical device industry in the US is in jeopardy with the upcoming Presidential election. The issue at hand: The Patient Protection and Affordable Care Act (PPACA).


In March of 2010, President Barack Obama signed into law the PPACA, initiating the largest overhaul of the US healthcare system since the creation of Medicare and Medicaid in 1965. The goal of the PPACA, or “Obamacare”, is to reduce the number of uninsured Americans and decrease the cost of health care. So why is the medical device industry up in arms? Increased costs associated with health care reform require new streams of federal revenue. One such source, which was included in the PPACA, is through the taxation of medical device manufacturers and importers.

The Medical Device Tax (MDT), which is estimated to generate $20 billion in ten years, will impart a 2.3% tax on all device manufacturers and importers in the US. The governmental justification for this tax is that the PPACA will increase the number of insured people in the US, translating into new business for medical device companies. This will generate a new source of revenue for the device industry effectively offsetting the cost of the new tax.

Opponents of the PPACA state that it will critically harm the industry by stifling innovation, reducing employment and encouraging the exodus of medical device production outside of the US. Industry professionals and politicians from Minnesota are leading this charge to repeal the MDT. Minneapolis and St. Paul is one of the largest medical device hubs, housing notable companies like 3M, Medtronic, American Medical Systems and St. Jude Medical. Through the initiative of LifeScience Alley, a trade association that facilitates development of Minnesota’s medical device and biotech industry, the local industry has lobbied for a repeal of the MDT. These actions have gained the support of local politicians, including US congressman, Erik Paulsen (R-MN). Such vibrant opposition is also found in other medical device hotspots across the country, including Colorado and California. Thus far, all action towards repeal of the tax have been thwarted by the Supreme Court decision in June 2012 upholding the constitutionality of the PPACA and ensuring its continued implementation.

With the next presidential election fast approaching, the fate of the PPACA and it’s impact on the medical device industry is imminent; Romney vows to repeal Obamacare if elected, while re-election of President Obama most certainly solidifies the completion of health care reform. So, let us examine the argument for and against the MDT.

Medical device bullying: Opponents have suggested that the Obamacare has unfairly targeted the medical device industry by placing such burdensome tax on their products. The truth, however, is that the medical device industry is just one of many sectors that will see increased taxation to help offset the costs of universal health care. Again, the tax was justified by a speculated increase in device users due to the new healthcare subscribers under the PPACA.

Industry oversea exodus: Contrary to the claims by its opponents, the MDT creates no incentive for US companies to shift their operations overseas. In fact, the PPACA was carefully designed to avoid such a manufacturing exodus by applying the tax equally to both imported and domestically manufactured products. In addition, US manufactured devices that are exported are tax-exempt. This exemption may actually help to expand the market for US made medical devices by encouraging export.

Stifling innovation: The 2.3% Medical Device excision provision, which taxes all companies that manufacture and import medical device related products, will affect large and small companies differently. Larger companies will have to re-examine the efficiency of their administrative and manufacturing operations in order to offset the costs of the excision tax. In the short term this may require a workforce reduction. A study released and financed by AdvaMed, an industry trade association, suggests that the MDT could result in a net loss of over 45,000 jobs in the US. A few companies, such as Minnesota-based St. Jude Medical Inc. and Michigan-based Stryker Corporation, have cited anticipation of the tax law to support the recent release of hundreds of employees and as justification for considerable administrative restructuring.

While a 2.3% tax is unlikely to dramatically affect the operations of larger medical device companies, smaller startup medical device companies will be burdened with additional financial hurdles. This is because the MDT taxes the total revenue of the company, regardless of whether it turns a profit. Small device companies often spend more of their earnings on research and development than the revenue they collect from sales. Thus, many businesses will owe more taxes than they generate from their operations. This puts a greater financial burden on start-up medical device companies just to sustain their product development.
Defenders of the tax say that any loss in revenue from the excision will be more than made up for by increased business through new health care beneficiaries. In Massachusetts, where universal health care was put into place in 2006 by then-governor Mitt Romney, local medical device companies have not seen increased revenue or product use despite an increase in people with health care. Many healthcare providers rely on medical products from providers across the country, thus, extrapolating the effects of Massachusetts health care reform on local medical device profitability is misleading.

In the end, it is clear that under the MDT companies will be forced to undergo a severe cost-restructuring, eliminating inefficient business operations to absolve the cost of the tax. With restructuring comes layoffs, which, in the short term, will elevate the already high unemployment in the US. In the long run, however, operations overhaul will result in a more cost-conscious and efficient business model. I expect that a brief lull in innovation and creation will occur while medical device industry adapts to the new tax, but will be followed by a return of the illustrious and prolific US medical device industry.

With just under a week until the next US Presidential election, the future of the PPACA and the medical device industry is on the line. Unfortunately, claims by both the advocates and opponents of the new tax are really only speculation. With that in mind, it is up to the voters to assess how much they want to gamble on nationalizing healthcare in the US? Specifically, are the potential negative effects on the medical device industry worth upholding the PPACA? And, would these negative effects be permanent?