Among the many things wrong with ObamaCare is how an obscure tax that helps pay for the program is hammering the US medical-device industry, killing jobs and threatening lifesaving advances.
These devices include some of the genuine miracles of modern medicine: pacemakers, artificial joints, replacement heart valves, arterial stents, scanners and radiotherapy machines.
For a sense of how vital they are, consider my recent surgery to remove cataracts (cloudy lenses in the front of the eye) and replace them with synthetic lenses. The surgeon used highly specialized equipment that the government regulates as medical devices, including:
- A special scalpel to make a tiny incision in the cornea (the clear membrane that covers most of the surface of the eye) and the capsule that encases the lens.
- A needle-thin tube to carry out a procedure called phacoemulsification, in which the vibrating tip of an ultrasound probe disintegrates the cataract, which the surgeon then suctions out (through the same tube).
- The synthetic intra-ocular lens that the surgeon inserted into the empty space within the capsule where the natural lens used to reside.
- The operating microscope through which he performed the operation.
Our country has been the global leader in medical devices; it’s one of the few major US industries that both boasts a net trade surplus and is a job-creator. The sector employs 400,000 Americans directly, while almost 2 million more supply and support its highly-skilled workforce. Its products are essential to modern medical care.
But the industry is being ravaged by a 2.3 percent excise tax that took effect on Jan 1, 2013, as part of ObamaCare.
What makes the tax particularly devastating is that it’s assessed on gross sales, not profits. So if you had a profit of $100,000 on sales of $1 million after all your costs and expenses, the excise tax would be $23,000, wiping out almost a quarter of your profits. (And, yes, you’re still paying lots of other taxes, as well as “user fees” to get the FDA to review your applications.)
What’s especially punishing is that medical-device firms often have to ramp up sales before they start turning a profit. Thanks to a long and draconian regulatory process they must negotiate before they can even sell a product, it can take $70 million to $100 million in total sales before these businesses make their first cent of profits. Yet they have to pay the excise tax on their revenues.
And the industry is not composed of behemoths: 80 percent of its companies have 50 or fewer employees, the very firms we are relying on to boost the post-recession US economy.
The industry has already paid billions in excise taxes. Companies have reacted to the lost revenue in a variety of painful ways — laying off workers; cutting employee pay; slashing R&D budgets and capital investment; moving manufacturing overseas, and canceling or delaying new facilities. For example, the vice-president of BD Medical said last month that the tax is costing his company about $55 million a year, which has forced cutbacks in R&D.
After just 13 months, the tax has already cost on the order of 33,000 jobs in the industry itself and more than 100,000 more jobs due to the ripple effects. One device maker, Stryker, laid off 1,170, 5 percent of its workforce, in anticipation of the tax. Another, Boston Scientific, announced last October that over the next two years it would lay off between 1,100 and 1,500. Countless other firms have frozen hiring and stopped matching contributions to retirement plans.
There is strong bipartisan sentiment in Congress for repealing the tax. Rep. Erik Paulsen (R-Minn.), the co-chair of the Medical Technology Caucus, has been nothing short of heroic in rallying support for repeal. His bill to kill the tax now has 270 co-sponsors in the House, including 43 Democrats. The Senate also expressed overwhelming support for repealing the tax in a lopsided 79-20 nonbinding budget vote.
The president and his allies must understand that individuals and businesses actually respond to carrots and sticks — and the excise tax is a huge stick beating down this industry. America needs a more nurturing entrepreneurial climate, in which ingenuity and innovation are rewarded, not penalized. We’re getting the opposite.
Henry I. Miller MD is the Robert Wesson fellow in scientific philosophy and public policy at Stanford University’s Hoover Institution. He was the founding director of the Office of Biotechnology at the Food & Drug Administration.