Medical-Device Excise Tax: The Case For Repeal Needs New Arguments

Commentary by John R. Graham

Source: Forbes

Where is the momentum to repeal the medical-device excise tax? The tax is a universally reviled Obamacare revenue-raiser. First levied in 2013, it skims 2.3 percent off the sales of medical devices in the U.S. Outside liquor and tobacco, most Americans don’t suffer excise taxes, which are levied on gross sales, irrespective of a company’s profitability.

(DISCLOSURE: From 2012 to 2013, I served as a Vice President for payment and health care delivery research and policy at the Advanced Medical Technology Association, the medical devices trade group.)

Repealing the excise tax has wide bipartisan support in both chambers of Congress. Obamacare champions including Representative Nancy Pelosi and Senator Al Franken – both of whom voted to impose the tax when they voted for Obamacare – have manned the ramparts for repeal. Unfortunately, they cannot get a bill to the President’s desk. Further, early forecasts of catastrophe for the industry to do not appear to be playing out. A recent report from EP Vantage concludes that thirteen of the fifteen largest medical-device makers increased headcount in 2013, and two of the three who shrunk did so through selling subsidiaries. This is not what were led to expect before the excise tax started to bite.

Diana Furchtgott-Roth and Harold Furchtgott-Roth published a study concluding that the tax would cost 43,000 American jobs. Similarly, Michael Ramlet and Robert Book of the American Action Forum wrote an analysis in 2012, which predicted job losses of at least 14,500 and up to 47,100. Were they wrong? Perhaps not.

Some of the growth in headcount in large companies resulted from acquisition. In such cases, we might expect net job losses. My colleague, Devon Herrick of the National Center for Policy Analysis, has explained that that most medical-device firms in the U.S. are relatively small. 95 percent of U.S. headquartered firms have sales less than $100 million, and focus on domestic rather than international sales. It is more difficult for these companies to avoid the tax by focusing on exports. And growth in medical devices is pretty much all overseas. So, it makes sense for larger firms to roll up smaller ones.

On the theory that the tax’s impact would first show up in U.S. versus international sales, I wrote an article in Forbes in September 2013 showing that U.S. sales were suffering versus international sales.

Well, the tax has been in effect for over a year and a half now, and its negative effect on U.S. sales of medical devices appears to persist. As in my previous Forbes article, I focus my analysis on the largest manufacturers.

Of the ten largest medical-device companies, as defined by the online trade publication, Medical Device & Diagnostic Industry, it is possible to discover relevant information from eight of them. They all indicate that U.S. sales are flagging, relative to international markets:

  • Johnson & Johnson JNJ -0.77%’s medical device and diagnostic sales were down 1.5 percent in the U.S., versus up 1.8 percent internationally, in the first half of 2014.

  • Siemens reported that healthcare orders were down in the Americas, for the first nine months of 2014.

  • General Electric reported that the U.S. healthcare market continues to be “challenging”, and sales shrank by 2 percent in the second quarter, versus up 2 percent in Europe.

  • Medtronic’s U.S. sales for the 2014 fiscal year were up 1.7 percent, versus 5.9 percent internationally.

  • For Baxter, U.S. sales of medical products were down 15 percent for the quarter ended June 2014 in the U.S., versus up 8 percent globally.

  • Fresenius’ U.S. sales of dialysis products were down 1.2 percent in the first half of 2014, versus up 0.6 percent internationally.

  • Philips report for the first half of 2014 states that: “comparable sales in Western Europe were flat and other mature geographies showed low single digit growth, while North America recorded a low single-digit decline.”

  • Covidien does not clearly segment U.S. sales from international sales in its results. Nevertheless, during the nine months ending in June 2014, Covidien’s excise-tax liability was $47 million. For the same nine months ending in June 2013, it was only $30 million.

So, the business environment in the U.S. continues to deteriorate, versus international markets. And these are the largest, global medical-device manufacturers, which can more easily overcome U.S. weakness by beefing up international sales. Perhaps that explains why large firms have added jobs. Nevertheless, it saps the energy needed for repeal.

What can be done to move the repeal along? Clearly, new research is needed to qualify the employment situation in the industry. Also, the industry has recoiled from suggesting a “pay for” to replace the revenue lost to the government if the tax is repealed. Finding a “pay for” is an important step for legislative success.

Time is not on the side of repeal. The longer the tax persists, the longer it is likely to continue.