The Affordable Care Act's tax on innovation

July 23, 2015 OpenSystems Media

In January 2013, EMF published a controversial paper, “The Affordable Care Act’s Tax on Innovation – Issues Confronting Medical Device Manufacturers,” available for free download at www.embeddedforecast.com. At that time, I received criticism (some severe) from colleagues (and from folks I didn’t know) that accused me of “playing politics” and being guilty of acts “misleading members of our industry.” In addition, I received criticism from thoughtful colleagues who thought that I was being unreasonably worried.

I found this strange since even our far-to-the left Senator from Massachusetts loudly denounced this act as Massachusetts employed more than 400,000 people in the medical device industry. Having personally founded four medical device companies (and taken two public) the issue of political correctness was far from my concern. I thought of this act – notwithstanding my feelings regarding the ACA (Obamacare) – as being an unnecessary industry killer being unreasonably imposed on one of the few worldwide industries dominated by U.S.-based companies.

With the days of the Obama administration being counted down, there’s been a strong bilateral (and veto proof) push to remove this burdensome tax within Congress. But let’s compare what I most feared 30 months ago to the reality of what the medical device industry has incurred. One first needs to understand the burden the ACA has placed on medical device companies:

  • The medical device tax (2.3 percent) is imposed on revenues, not profits
  • It MUST be paid twice a month (24 times a year), even if revenues haven’t been collected yet. Most customers pay on a 30- to 90-day term, but the tax on sales is due regardless
  • The financial impact of the 2.3 percent tax doesn’t include the annual cost of the associated accounting, auditing, record keeping, and such
  • It would take a moron NOT to see that this would create a severe cash-flow problem (particularly for small and startup companies), but we apparently have a lot of morons. The fact that we reelected a president that convinced us that we could add 30 million need patients to the healthcare roles and still save families $500/year supports this idea
  • The money has to come from somewhere, so the only places to cut are R&D (new product developments) and salaries (necessitating layoffs)

One doesn’t need to be a visionary to have seen this coming. We got MIT Professor Gruber to admit (on video) that the entire ACA program was based on “the stupidity of the American people.” The insidious part is that this was presented as a “small” tax and therefore reasonable.

We needed Captain Obvious, not Gruber. So what has happened during the last 30 months?

  • Hundred of small medical device companies have gone out of business or have been absorbed by larger companies
  • Published studies have estimated that more than 43,000 employees have been laid off, in addition to the estimated $3.5 billion in lost wages
  • Numerous (many large) companies have moved all or part of their operations and manufacturing overseas

In his testimony to the Senate Finance Committee (Subcommittee on Health Care), Bruce A. Heugel, senior VP and CFO, B. Braun of America, said that, due to the medical device tax, the company’s federal tax bill increased by 29 percent. As a result, he claims that his company has lost $33 million since the tax was enacted, requiring major cutbacks. He stated, “So when the new medical device tax takes away $33 million through 2015, we are forced to launch painful counter measures.” He further said that the tax has forced B. Braun to lay off 200 workers from their medical device workforce, cut pension plans, decrease R&D spending, and cancel plans to build a new headquarters. Citing a study, Heugel testified that the medical device tax wipes out 29 percent of the profit for the industry, which significantly lessen manufacturers’ ability to develop new products.

I take no pleasure in having predicted the obvious. Hopefully, with the 2016 elections on the horizon and senators and representatives facing reelection (many from states that contain medical device companies), a veto-proof majority will at long last be repealed. Hopefully we will not need to endure such insanity again.

Jerry Krasner, Ph.D., MBA is Vice President of Embedded Market Forecasters and its parent company, American Technology International. A recognized authority with over 30 years of embedded industry experience, Dr. Krasner has extensive clinical research and medical industrial experience, including the successful filing of over twenty 510k submissions. He earned BSEE and MSEE degrees from Washington University, a Ph.D. in Medical Physiology/Biophysics from Boston University and an MBA from Nichols College. He has been a visiting professor at the Universidad de Las Palmas (Spain) where he was recognized for his work in neurosciences and computer technology.

Dr. Jerry Krasner, Ph.D., MBA, Embedded Market Forecasters
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