Obamacare Excise Tax - How it Affects New Medical Innovation

Obamacare Excise Tax - How it Affects New Medical Innovation

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In March of 2010, President Obama signed into law the Affordable Care Act (now often known as "Obamacare").

There is a provision in the bill that has recently been gaining bipartisan support for repeal: a 2.3% excise tax was placed on all medical manufacturers in this country. This provision was intended to raise $20 billion to offset some of the expenses of the Act, but will have the unintended consequence of stifling innovation in the U.S. medical device industry.

Evan Bayh recently had an op-ed article in the Wall Street Journal calling for the repeal of this tax, even though when he was in the Senate he voted for "Obamacare". He points out that medical device manufacturing is one of the few industries the US still holds an advantage over the rest of the world. We currently are a net exporter of medical devices, and this is an industry that employs 400,000 individuals directly and probably as many as 2 million indirectly. This is larger than the auto industry, and we have created a tax structure that now encourages manufacturers to move their operations overseas.1

Medtronic, the world's largest manufacturer of medical products, just purchased a large medical manufacturer in China (Kanghui Holdings), presumably to avoid the coming taxes on medical manufacturers.

Another spinal device company, Spine Wave, had expected to be able to reach break-even on cash flow, but now due to the added excise tax - on its revenues - expects continued losses.2

This is not so much a tax as it is a fee for being in the medical industry. The tax is assessed on a manufacturer's activity in the medical market. So, for each dollar that a company has in sales/revenue it owes 2.3 cents to the government. Typically, taxes are only levied on profits, not gross sales. Even if a company is not profitable it still owes the tax.1

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This is going to put many start up manufacturers out of business, and worse yet, will prevent new technologies from ever getting to the market place. Besides the potential for massive job loss in the medical device industry, new technologies for the medicine will become quite limited.

The House of Representatives has passed a bill rescinding the tax with bipartisan support, but so far it has been held up in the Senate by Harry Reid. Senator Orrin Hatch is pushing to have it brought to the floor for debate, but little is likely to happen before the election. Hopefully, Washington for once will come to its senses and repeal this bill (which takes effect in January). If not, medicine and jobs in this country will be dealt a severe blow at a time when the economy is very sensitive, and it is highly unlikely that the tax will ever produce anywhere near the $20 billion it was designed to create.

In the interest of disclosure, Spine-health would like to point out that Dr. Ullrich is also the CEO of Titan Spine, a medical device manufacturer.

Sources:

  1. Bayh, Evan, "ObamaCare's Tax Raid on Medical Devices," Wall Street Journal Online, published Sept. 27, 2012, accessed Nov 6, 2012.
  2. Gormley, Brian and Maltby, Emily, "Medical Start-Ups Challenged by Health-Care Reform," Wall Street Journal Online, published Nov. 1, 2012, updated Nov. 5, 2012, accessed Nov 6, 2012.
Article written by: Peter F. Ullrich, Jr., MD