The cost? 43,000 US jobs and $3.5 billion in wages

Scott Brown

Hello, I’m United States Senator Scott Brown.

This week the Supreme Court debated the constitutionality of the President’s healthcare law. I'll leave it to others to speculate on the outcome of this hearing but I do want to talk to you today about one part of the healthcare law that is particularly damaging to our company in Massachusetts.

Under the President's law, medical device manufacturers will have to pay a 2.3% excise tax on revenues in 2013.

This is a “Jobs Killer.” We just can't let it stand.

Our economy is still struggling to come back from the turmoil of 2008 and, nationally, our unemployment rate has remained above 8%. We were still doing a little better in Massachusetts but part of why we're doing better is our strong medical device manufacturing industry.

The medical device tax threatens our economy and our economic recovery in Massachusetts. And with more than 400 medical device firms and employing nearly 25,000 workers and contributing more than $4 billion to our economy, the Commonwealth can simply not afford to have this industry targeted with the tax.

If enacted, this harmful tax will put American workers at a competitive disadvantage and chase jobs overseas.

The medical device tax would likely cost 43,000 jobs across the country at the loss of $3.5 billion in wages. Massachusetts alone is estimated to lose more than 2,600 jobs as a direct result of this tax, so about 10% of our entire medical device manufacturing workforce.

We just can't have that kind of job loss when our economy is still struggling. That's why I've taken action to protect Massachusetts jobs. I have introduced legislation to repeal this harmful tax and give our economy to grow.

Although repealing this medical device tax fits into the category of a “common-sense pro-jobs measure,” it has been difficult to get Congress to act. In fact, many worthy pieces of legislation aimed at spurring job growth and economic development have been trapped in partisan gridlock once again.

In an effort to bridge the divide, I have called on the leaders of both parties to shift the focus away from politics and towards bipartisan jobs sick. We need it now. We saw some success last week when Congress passed my legislation and encouraging Crowdfunding; that is, providing additional revenue [editor’s note: capital] sources for young start-up businesses.

Many of the good pieces of legislation that could help our struggling economy are still blocked. And I will continue, trust me, I am going to continue to push for congressional action on legislation like my repeal of the medical device tax that will help get our economy moving again, especially in Massachusetts.

We can do a lot at home in our communities to promote a stronger job market. But Washington needs to start helping rather than hurting our most promising Bay State industries so they have the confidence to build and grow in Massachusetts.

Thank you very much.

ACA’s 2013 medical device tax has already killed jobs, expansion plans

The Patient Protection and Affordable Care Act (ACA) includes a new 2.3% tax on the U.S. sale of medical devices beginning in 2013. The tax was included to raise $20 billion in revenue to partially offset the cost of the new, $1 trillion health program. Kem Hawkins The 2.3 percent tax is imposed on revenue, not profits, so that the tax applies to devices regardless if they are sold at a loss.

This particular financing measure is now the target for repeal by a growing number of Members in Congress because of its impact on patient access to life-saving therapies, American jobs, and medical innovation in the United States.

Regardless of how the Supreme Court rules on the ACA, there are many claims about the tax that are inaccurate and do not reflect existing realities about its impact.

Jobs and investment will suffer

Claim: The new tax will not shift employment offshore because the tax does not create an incentive to move production overseas.

Reality: Even without going into effect until 2013, the device excise tax has already caused companies to lay-off workers, grow device manufacturing jobs outside the U.S.,reduce investment in research and development, and eliminate capital investment in new U.S. facilities. The device excise tax applies to the sale of medical devices in the U.S.

This is on top of our federal tax rate at 35 percent and state and local taxes. Combining these U.S. taxes with a slow and cumbersome approval process, the excise tax adds tremendous disincentive to companies wanting to stay in the U.S. and compete in the global marketplace. Compare Ireland’s tax of 12.5 percent of profit and Canada’s national tax of about 15 percent of profit for most companies to the existing U.S. tax rate of 35 percent that many companies face.

Tack on the new federal tax of 2.3 percent of sales, which equals about a tax of 15 percent on profit for most companies, and U.S. manufacturers in 2013 will pay a tax of about 50 percent for every dollar earned. Companies operating outside the United States will be at a distinct competitive advantage as those taxes start from a significantly lower base.

It’s disingenuous to say that that level of taxation will not lead companies to locate new factories and research and development arms outside of the U.S. Foreign manufactures have a clear price advantage by paying a tax bill that can be half what a comparable U.S. firm will pay. Academic claims that the tax will not have an impact on U.S. jobs is na ve and does not match reality. Medical device companies have signaled a warning for several months now.

Here are just a few examples:

  • Stryker Corporation announced a layoff of 1,000 workers due to the tax
  • Boston Scientific built a $35+ million research and development center in Ireland instead of North America
  • Boston-Scientific is also girding for a $100+ million charge to earnings in 2013
  • Zimmer plans to lay off 450 and take a $50 million charge against earnings
  • Cook Medical has shelved plans to build a medical device factory annually in the U.S.

No windfall for the device industry

Claim: The ACA will insure millions of people and therefore device companies will benefit from new business through the sale of more devices.

Reality: Reducing the number of uninsured will not increase the number of patients seeking medical devices. Most of our medical technologies are either used today by patients in emergency situations or by elderly patients who are already insured by Medicare. There will be no windfall for our industry just because more, non-elderly patients have access to insurance.

Here’s why: In the emergency room today, patients receive our technologies regardless of whether they have health insurance or not. These devices that are used in this setting include drainage catheters, tracheostomy tubes, intubation devices and myriad of other devices to maintain life. Federal law requires that all patients in need of emergency services be treated regardless of their ability to pay or whether they have health coverage. The ACA does not change this paradigm.

Further, the administration has stated that the demographic group that will most benefit under the ACA are the non-elderly. Young people tend not to be in need of stenting or other vascular or organ repairs for aging related conditions. Most of the patients that use our products are elderly and today they are either treated in the emergency room without regard to health insurance or covered by Medicare that already reimburses hospitals for medical devices.

This analysis is borne out in Massachusetts, which has a similar universal health care approach. Internal analysis shows that medical device sales did not increase beyond the increase expected prior to enactment of the Massachusetts new health law.

Devastating impact on medical innovation

Claim: Tax will have little effect on medicalinnovation.

Reality: The device excise tax will have a real and serious impact on medical innovation in the United States as research, development and manufacturing move overseas as a result of the existing tax and regulatory systems in this country. While the medical technology industry has helped to fuel the U.S. economy in recent years, its position as a global leader may erode over the next decade.

This will no doubt affect: 1) the ability of Americans to access future break-through medical advancements; and, 2) the growth of U.S. jobs. In the future, China, India and Brazil will experience the strongest gains in developing next-generation products. Without changes to U.S. policies, gains may lead to an exodus of capital, jobs and research away from the U.S. toward these growing markets. (Source: ’Medical Technology Innovation Scorecard: The Race for Global Leadership,’ PwC, January 2011.)

The economics of this highly competitive sector are not static and several policies have driven American medical device companies to seek clinical data and launch new products outside of the United States. The new, 2.3 percent excise tax on the selling price of a device will leave companies no choice but to reduce research and development and capital investment in the U.S. It will lead companies to migrate to lower cost tax jurisdictions and tax start-up companies, whether those firms have profits or not.

The new tax will force companies to limit research budgets to test new products and ideas – the lifeblood of growing device companies. When these resources are curtailed, patients pay the price with more limited medical treatment and a reduced chance of survival.

In addition, the tax will limit capital investment in new facilities. Boston-Scientific projects a $100+ million annual hit to earnings from the tax. Cook estimates it will cost $20 million a year ’ about what we had planned to invest annually in new factories across the Midwest, factories such as the plant that opened 1n 2010 in Canton, Ill., or the expanded plants opened in 2009 in Spencer, IN.

Wages from those jobs ripple through and strengthen the local community. This new device excise tax will deny patients access to life-saving medical technologies because companies will be forced to move jobs and research facilities overseas. It is fool-hardy to believe that U.S. companies will be able to compete globally when their competitors do not face the tax and regulatory burdens here in the United States. We are already seeing the impact of the medical device tax and this is just the beginning if this tax is not repealed. Americans deserve access to these break-through technologies.

Medical device tax tab now at $30.5B

The medical device tax will raise 50% more than the $20 billion the government said was needed to pay for med-tech's share of health care reform, with official government estimates pegging the total tab over 10 years at $30.5 billion.

For 2 years the medical device tax has been billed as the $20 billion price tag the med-tech industry must pay to cover its share of health care reform.

But as the levy moves closer to its January 2013 implementation, official government estimates and industry advocates now peg its price tag at $30.5 billion over the next 10 years. A MassDevice.com analysis revealed that the med-tech tax will likely cost the industry much more than official Congressional estimates of $1.8 billion next year.

The revelation both calls into question the accuracy of current government estimates and those on which the tax was originally sold to industry, Congress and the American public by the bill's framers.

Don't expect the feds to refund any money for overpayment if the bill does manage to make it to 2013 without being repealed, according to Richard Price, vice president for payment and health care delivery policy at industry lobby AdvaMed.

"Congress did not establish an aggregate amount in a given year. Rather, it's a tax rate," he told us. "There's no excess amount that's going to be paid back."

Although AdvaMed has not put out an official estimate on the yearly cost of the tax, Price said, the group is relying on numbers provided by the White House Office of Management & Budget and the Joint Committee on Taxation in Congress.

Both offices estimate that the device tax will raise some $1.8 billion in 2013 and average of about $3 billion a year until 2020, for a total of $20 billion. But in President Barack Obama's most recent budget the Dept. of Health & Human Services extrapolated the tax through 2022, adding nearly $8 billion in expected revenues for a 10-year total of more than $30 billion.

The JCT, a nonpartisan panel, assists Congress in making "objective and informed decisions with respect to proposed revenue legislation," according to its latest publication, "General Explanation of Tax Legislation Enacted in the 111th Congress" (JCS-2-11), which extrapolates through 2020 the taxes the measure is expected to raise.

A MassDevice.com analysis reveals that the tax is likely to bring in more than $2 billion in revenues next year from just 50 of the top medical device companies, meaning the estimated impact could be substantially higher than the government's own estimates.

While several repeal efforts are already underway in Washington, Price said the impact of the tax will be felt well beyond the next 10 years, as "there is no sunset attached to this provision."

Mark Leahey, president & CEO of the Medical Device Manufacturers Assn. which represents about 250 small medical device companies across the country, said it's time to retire the $20 billion for good, saying that those numbers were best-guess estimates at the time and are no longer valid.

"It's frustrating to look and see that the tax has grown 50% in just 2 years," Leahey said, noting that MDMA members are more focused on the direct impact on their own firms.

"These companies are facing tough choices every day about who to lay off and what projects you can't fund," he told us. "Unfortunately, those are the daily decisions companies are making – and none of them are about improving care."

Med-tech might have been better served under a Senate version of the Patient Protection & Affordable Care Act, which would have established the levy as a fee rather that a tax. The fee was converted to an excise tax in March 2010 as legislators worked to reconcile House and Senate versions of the bill.

"I think we all would've been better off if there was no tax whatsoever," Leahey said. "However, if the options were the House or the Senate version, the Senate version would have resulted in industry paying less. Had Congress stuck with the Senate version, we not have had a $30.5 billion tax."

Analysis: Medical device tax revenues could top $2B next year

A MassDevice.com analysis shows that the medical device tax set to go into place next year could generate significantly more revenue than the $2 billion a year the Obama administration projected.

The medical device tax set to start next year has become a lightning rod for criticism, with the med-tech industry claiming it will be catastrophic for the industry and its critics claiming those concerns are overblown.

AdvaMed, the national lobby for the medical device industry, commissioned a pair of reports it says show that the tax will kill between 39,000 and 43,000 med-tech jobs and cost the industry between $670 million and nearly $7 billion. Countering those claims, Bloomberg Government issued a report of its own saying the real cost won't be anything like that.

But a MassDevice.com analysis of last year's U.S. sales for nearly 50 of the largest medical device makers reveals two potential aspects of the tax that neither side addresses:

First, the tax could have a wildly disproportionate effect on med-tech companies, depending on their margins.

Further, our analysis revealed that the tax, as currently constructed, is likely to generate far more revenue than the $2 billion a year it's designed to deliver.

Sen. Scott Brown (R-Mass.) told MassDevice.com he isn't surprised about our findings, saying that the politicians who wrote the law "knew what they're doing" when they created the tax.

"We can't get any accurate numbers and the numbers that are coming out now are all over the place. It's very frustrating that it's so tough to get a straight answer," Brown told us.

Asked if it's fair to call his position "repeal or bust," Brown dismissed the idea of altering the scope of the med-tech tax.

"It doesn't help to modify it by going to a lower rate," he said. "No, the bottom line is the [tax] is just there to pay for a health care bill I didn't support in the first place."

An uneven playing field

While the tax prescribes a flat 2.3% levy from all U.S. sales of medical devices, the effects would be wildly disproportional in practice.

For several companies that posted losses last year, the tax would have pushed them further into the red, and for a few companies it would have meant a swing from profitability to losses.

For more than 75% of the other companies on our list, the tax means lower profits by between 5% and nearly 50%. Take Integra LifeSciences (NSDQ:IART), which posted U.S. medical device sales of about $593 million last year, according to Integra's annual report. A 2.3% whack would have taken $14 million off the top line – exactly half of Integra's 2011 profits.

For 6 of the med-tech companies on our list, the tax would have meant more red ink, ranging from 9% (Philips (NYSE:PHG)) to 934% (Orthofix (NSDQ:OFIX)). For 3 others, the tax would have pushed them from black to red. ConMed's (NSDQ:CNMD) $1 million in profits would have turned to an $8 million loss; SonoSite's (NSDQ: SONO) $1 million bottom line would have swung to a $3 million loss; and Symmetry Medical's (NYSE:SMA) $3 million profit would have instead been a $3 million loss.

Bloomberg Government takes on AdvaMed's report

Industry lobby AdvaMed issued its own analysis of the medical device tax last September, focusing on overall impacts to the industry. According to the study's authors, the impending levy represents "the last straw on the camel's back" for medical device companies trying to thrive in the struggling American economy, all but forcing companies to ship manufacturing overseas.

AdvaMed's ominous projections got a lot of attention, especially from members of Congress already favorable to the industry, but it also caught the eye of Bloomberg Government analyst Christopher Flavelle, who deemed the entire report "not credible."

The figure came from an economic analysis commissioned by AdvaMed and conducted independently by Diana Furchtgott-Roth, senior fellow at the Manhattan Institute, and Harold Furchtgott-Roth, former chief economist of the House Commerce Committee.

"We are not in a strong economic position," Diana Furchtgott-Roth told media during a September conference call when the report was released. "This is not the right time to impose a new tax."

The threat of 43,000 U.S. jobs lost became a rallying cry among industry supporters protesting the tax, including med-tech advocate Rep. Erik Paulsen (R-Minn.) who cited the figure in a letter, with 74 co-signers, sent to House leaders last month.

Medical device executives and related lobbies also used the estimate liberally, especially as companies such as Zimmer (NYSE:ZMH) and Stryker (NYSE:SYK) began announcing layoffs in efforts to cut costs ahead of the tax. But Bloomberg's Flavelle cast a wary eye on the industry report, chiding it for exaggerating the impacts of the levy without enough solid evidence.

"AdvaMed's "reasonable assumptions" conflict with economic research, overstate companies' incentives to move jobs offshore, and ignore the positive effect of new demand created by the law," Flavelle wrote.

Flavelle's arguments stemmed from a Bloomberg Government analysis that he also penned entitled "Medical Device Industry Overstates Tax Impact," in which he breaks down the assumptions underlying the AdvaMed report's projections.

He argues that the study's authors rely too heavily on hypotheticals that blow the tax's potential impact out of proportion, especially in regard to the loss in revenue and shift to overseas manufacturing.

The AdvaMed report's most salient projections include heavy layoffs, closure of U.S. plants in favor of overseas manufacturing, price increases on life-saving medical devices and reduced research & development budgets.

Flavelle concedes that the industry may take some hits, but believes losses in revenue attributable to increased prices may be partially or entirely recouped by the 23 million Americans newly insured under health care reform. He finds the threat of a flight overseas untenable, as "the tax by itself creates no specific financial incentive to move production," and he paints the 43,000 jobs lost estimate as little more than a wild guess.

"This industry, as with any industry, has a responsibility to its shareholders to maximize profits and minimize costs at all times, before the tax and after the tax," Flavelle told MassDevice. "The question isn't whether there are incentives to cut costs - there are always incentives to cut costs. The question is, what new incentives are created by this tax to move jobs overseas?"

"If it's more cost-effective for Company X to create devices in some other country, you've got to assume from the outside that they would do that in the absence of the tax," he added.

AdvaMed generally dismissed the point as an editorial representing one person's take on the issue.

"Opinions are like noses," public affairs chief Gary Karr told MassDevice. "Everybody's got one."

The industry lobby stood beside its study, maintaining that it's the spirit of its conclusions that matter, not the numbers themselves.

"It's almost kind of beside the point whether 42,000 is the right figure or 39,000 is the right figure or 10,000 is the right figure or even 8,000," Karr said. "It's still a lot, that's our point, not the specific number that it's likely to be. We are certainly in danger of significant job loss because of the device tax."

"At the end of the day it's really incontrovertible that the medical device tax is a danger to jobs in the medical device industry – it's just a question of how much," Karr said. "I think for the people who have already been told that they're going to be laid off by companies who have already announced that, I think one job lost because of the medical device tax is one too many."

Who's paying the medical device tax?

Visual representations of the top 50 medical device makers by revenue, whose tab could top $2 billion next year when the 2.3% medical device tax goes into effect.

This is an interactive chart. Hover over the images and tables for more information.

Medical Device Tax: Ten companies in line for a whack

Ten of the companies slated to take a 2.3% hit to their top lines next year could also see huge whacks to their bottom lines, according to a MassDevice.com analysis.

The medical device tax set to take effect next year as part of the Affordable Care Act will see all medical device companies pay a 2.3% levy on U.S. sales. But the tax is likely to strike some companies a lot harder where it hurts the most: the bottom line.

A MassDevice.com analysis shows that the tax could have a disproportionate effect on the profits of at least 10 of the largest medical device firms – including 1 of the biggest names in the business.

Even as lobbyists scurry to limit the damage to their clients, the effects of the tax are already being felt on the street, as companies announce layoffs ahead of its implementation.

To get a sense of the revenue the 2.3% revenue tax will generate, we pored over the annual reports and filings of 49 companies selected from our Big 100 book of the world's largest med-tech players to isolate domestic revenues for fiscal 2011.

Our analysis shows that the following companies are likely to take much larger bottom-line hits than their peers in the med-tech industry, such as Boston Scientific (NYSE:BSX), which could see more than 21% shaved from its earnings:

Company 2011 profits ($M) Estimated device tax hit ($M) 2011 profits after tax hit ($M) % change in profits
Integra LifeSciences (NSDQ:IART) $28 $14 $14 -48.7%
Hanger Orthopedics (NYSE:HGR) $55 $19 $36 -34.2%
Cantel Medical (NYSE:CMN) $20 $6 $14 -30.4%
Cantel Medical (NYSE:CMN) $244 $65 $179 -26.6%
Zoll Medical (NSDQ:ZOLL) $31 $8 $23 -26.3%
Merit Medical (NSDQ:MMSI) $23 $5 $18 -23.3%
Boston Scientific (NYSE:BSX) $441 $93 $348 -21.1%
Hologic (NSDQ:HOLX) $157 $31 $126 -19.9%
Analogic (NSDQ:ALOG) $18 $3 $15 -18.6%
Greatbatch (NYSE:GB) $33 $5 $28 -15.3%

But for some companies, the bottom-line blow will be much easier to absorb. That includes another of the Bay State's med-tech giants, Covidien, and its projected 4.3% profit hit:

Company 2011 profits ($M) Estimated device tax hit ($M) 2011 profits after tax hit ($M) % change in profits
Abbott (NYSE:ABT) $4,728 $57 $4,671 -1.2%
Allergan (NYSE:AGN) $935 $13 $922 -1.4%
Danaher (NYSE:DHR) $2,172 $57 $2,116 -2.6%
Siemens (NYSE:SI) $6,145 $162 $5,983 -2.6%
Johnson & Johnson (NYSE:JNJ) $9,672 $262 $9,410 -2.7%
Fresenius (NYSE:FMS) $1,071 $30 $1,041 -2.8%
Covidien (NYSE:COV) $1,868 $80 $1,788 -4.3%
Sirona Dental Systems (NSDQ:SIRO) $122 $6 $116 -4.8%
Becton Dickinson & Co. (NYSE:BDX) $1,271 $63 $1,208 -4.9%
Varian Medical (NYSE:VAR) $399 $22 $377 -5.6%

Legislators and opinion leaders from areas with high concentrations of med-tech firms are lining up behind efforts to repeal the tax, led by Rep. Erik Paulsen (R-Minn.).

"This analysis shows the devastating effect the new medical device tax will have on device innovators all over this country," Paulsen told MassDevice. "The fact is, we have already heard from manufacturers who are laying off employees and are outlining plans to take their operations overseas in anticipation of the new tax. Exciting new start-ups that aren't even profitable will see their growth stifled by this onerous new tax. There is no room for this dangerous tax at a time when we should be doing everything we can to promote American made products, services, and innovation."

In Ohio, which also boasts a significant medical device cluster, the editorial page of the Columbus Dispatch weighed in with its own attack on the levy, saying it "is already killing jobs and hurting U.S. businesses."

And inside the Beltway, the device industry's trade groups are up in arms over the tax. Mark Leahey, president & CEO of the Medical Device Manufacturers Assn., told MassDevice that a repeal measure spearheaded by Paulsen is likely to come up for a vote on the House floor over the next few months.

"Your analysis demonstrates the importance of repealing this device tax sooner rather than later," Leahey told us. "Given the data that's being generated and the reports from the companies about the impacts [of the tax], we're confident that members of Congress in the House and Senate will recognize the importance of repealing this legislation. Even Democrats who supported the health care law are recognizing that there are certain targeted provisions that have unintended consequences. This is a bill that will enjoy bipartisan support because of the impact [the tax is] having on innovation and job creation."

A Google Maps glimpse of the impact of the medical device tax

This clickable map shows a list of companies who signed the petition against the tax.

The medical device tax, which will collect $30.5 billion from device makers over 10 years, is set to go into effect Jan. 1, 2013 and some companies are beginning to enumerate how much it will cost them.

Stung by what he believes will kill jobs and choke innovation, John Eckberg, a spokesman for the Cook Group, an Indiana-based medical device firm, decided that people really need to understand the wide swath of U.S. territory that will be affected by the device tax. He enlisted a colleague to call all 400 signatories of the letter written by the Medical Device Manufacturers Association that was sent to Congress to urge the repeal of the device tax.

And then decided to plot the impact on a map with the list of the locations of companies and their operations. Makes for a fascinating glimpse.

 

Special thanks to these vocal medical device tax opponents. They made this effort possible.