New Medical Device Tax is pushing manufacturers to lay off employees…but, it may only be temporary.

by theintrospectivemaster

The Affordable Care Act (Obamacare) was designed to ensure that it would not add to the national deficit. In order to expand health care coverage to 27 million Americans while not adding to the nation’s deficit, revenue enhancements were designed within the ACA in order to meet those increased expenditures. To accomplish this task, the ACA set forth to reduce medicare payments and apply new/increased taxes on industries that would benefit from the health care expansion: hospitals, health insurance providers and manufacturers of medical devices.

Beginning in 2013, medical device manufacturers are imposed a 2.3% excise tax on the sale of any taxable medical device manufactured or imported (exemptions are made to devices that retail for less than $100 in addition to other designated devices: eyeglasses, hearing aids and other devices that are generally purchased at retail by individuals).

The imposition of a 2.3% excise tax has been a contentious issue (especially among the medical device lobbying groups) as the fears associated with the excise tax would lead to off-shoring of medical device manufacturing, would limit research and innovation and lead to increased prices shifted to the consumer to cover the additional cost of manufacturing.

The fear surrounding the excise tax providing businesses an incentive to move their manufacturing off-shore does not seem to be a credible threat. The excise tax applies to imported manufactured medical devices in addition to devices manufactured domestically. The only incentive that could be credible to move production off-shore would be in relation to the associated labor costs overseas. The excise tax actually instead provides an incentive for medical device manufacturing to remain domestically as the excise tax does not apply to exported medical devices.

The fear the excise tax would retard medical device innovation as well seems to be not as credible as a threat as may have been promoted. Currently, the innovative research arm of medical device production has been in a rut for the past few years (so has big pharma as well). The rationale for this “rut” as it were is not one associated with new taxes or a regulatory climate, but instead is a self inflicted type of slowed innovation in the market. Innovations in the medical device market have been negligible to small changes to existing devices as investments in R&D have not yielded substantial results. To the contrary, new regulatory conditions established by the ACA in fact may provide incentive or competitive pressure for medical device manufacturers to invest and produce innovations as Government pressures to lower cost of health care.

A third concern deals with “cost shifting” in which the 2.3% excise tax will force manufacturers to pass on those additional cost to consumers through the prices of associated medical devices. While the concern is probable, the medical device market is highly competitive and there is a great deal of manufacturers that compete with one another to provide medical devices. Therefore, medical devices that are applicable to the medical device excise tax are highly sensitive to price; in order to remain competitive in the market, manufacturers will more than likely be unable to fully pass on the 2.3% excise tax on to consumers as other manufactures could then undercut the cost of the manufacture that decides to “cost shift”. Treatment for health conditions is elective and physicians can select alternative treatment methods for patients. If shifting the excise tax on to consumers is pursued and results in significantly increased prices for produced medical devices than consumers and physicians can elect to pursue other treatment options and forgo selection of the medical device that may have been used in the treatment.

Given these three concerns, one additional concern should be highlighted. As the 2.3% excise tax can increase the cost of production for a medical device manufacturer and medical devices are price sensitive in the highly competitive market, manufactures can elect to reduce other associated cost in the manufacturing process such as labor.

Stryker Corps. a medical device manufacturer based in Colorado announced in 2011 that it would move forward with reducing its workforce by 5% (estimated at 1,000 positions) and finish the layoffs by the end of 2012. Stryker’s CEO stated that the layoffs were in direct relation to the imposed cost of the medical device excise tax of 2.3%. Stryker estimated that the 2.3% medical device excise tax would cost the manufacturer over $100 Million in owed taxes to the Federal Government. Due to the highly competitive nature of the medical device market and the associated price sensitivity of manufactured devices, Stryker opted instead to reduce other associated cost in its production; in this case, that cost was labor.

Pat Stryker and Jon Stryker are the owners of Stryker Corp. who inherited the business from their father Homer Stryker who was an accomplished surgeon and founder of the company. Pat and Jon are major Democratic party contributors; Pat donated $175,100 to pro Obama super PAC and Democratic candidates including Obama. Jon donated $2,066,000 to Democratic super PAC and Democratic candidates. Though Pat and Jon are owners of Stryker Corps. they are not involved in the operations of the company.

Though Stryker Corps. reduced 5% of its global workforce as a result of the medical device excise tax, analysts state that the expansion of health care to 27 million Americans under the ACA will greatly benefit those industries involved in health care. The medical device manufacturing industry (as a whole) reports annual sales of $106 Billion to $116 Billion annually. Those sales are expected to grow as more individuals have access to healthcare and will need associated health needs including medical devices.

The ACA has not fully gone into affect, two weeks from now the open exchanges (where individuals can compare health care plans and purchase health care from across the nation among a wide variety of providers) will go into affect and the individual mandate will begin in 2014 followed by the employer mandate in 2015. By this time, the ACA will be in full effect and millions of new individuals will be a part of the health care market.

The Stryker Corps. layoffs may have happened relatively early before full implementation of the ACA, but given the likelihood of increases in medical related industries those jobs could return in addition to even more given the demand for medical devices when 27 million more individuals are seeking medical care.

Courtesy of The Colorado Observer

Courtesy of American’s for Tax Reform

Courtesy of The Center for Budget and Policy Priorities

Courtesy of Michigan Live