(Bloomberg News) 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.