- - Tuesday, January 15, 2013

With the start of the new year, one of the little noticed but potentially harmful features of Obamacare has now gone into effect. It is the tax on medical device manufacturers. The new tax of 2.3 percent is placed on the revenues of companies that produce medical devices such as heart valves, insulin pumps and hundreds of thousands of carefully engineered and regularly improved testing, diagnostic and treatment products that make modern medicine in the United States the envy of the world.

Medical devices are a central part of routine daily medical care. Anyone visiting the emergency room with a child or grandchild dehydrated by flu will find that the treatment of that relatively common, uncomplicated medical problem is dependent upon a bevy of medical devices, from the stethoscope and blood-pressure cuff to the intravenous-drip monitor. Of course, the more serious the malady, the greater the likelihood that physicians and nurses will use medical devices — MRIs, various scans and X-ray machines, to name a few.

Will higher taxes on companies that develop and manufacture these needed devices thwart their production? Without a doubt. The adage is true that if you want less of something, tax it. How will the tax affect the medical devices industry, and thus the health of all Americans?

First, as Hoover Institution fellow Henry I. Miller notes, the “tax is especially pernicious because it is assessed on sales, not profits.” For instance, if a small firm is developing a new medical device, it is not uncommon for that firm to receive sales revenues of, say, $2 million in the first year of sales, but to have only made an actual profit on those sales of $75,000 after research and development costs are taken into account. Because the medical devices tax is applied to sales, however, it imposes a tax of $46,000 (2.3 percent of $2 million). That means that the tax confiscates more than 60 percent of the net profits on that device. So the company’s capital is siphoned off by the federal government and, therefore, cannot be plowed back into more research and development. The Medical Device Manufacturers Association (MDMA) predicts (understandably) that product innovation will be “stifled” by the tax.

In addition, a PriceWaterhouseCoopers study released last August shows that investors, in anticipation of the burdensome tax, are already diverting investment dollars away from biotechnology and medical devices. As reported by business journalist Elizabeth McDonald, capital funding for the medical device industry during the third quarter of 2012 reached the lowest level since 2004. Investors are looking for profits and growth, both of which are made less likely by the Obamacare tax.

This isn’t the end of the story. There are still more negative impacts for medical device manufacturers. Reporter Mary Katherine Ham describes an Indiana-based company that has canceled plant expansion plans in anticipation of the impact of the devices tax. Ms. Ham also points to Abiomed, a Massachusetts-based company producing heart pumps, which will have an amount equal to 15 percent of its research and development monies taken away as a result of the new tax. Medical devices companies are also cutting down on employees. Ohio Republican Rep. Robert E. Latta refers to a Reuters report that shows medical technology companies already have cut 7,000 U.S. jobs. Moreover, a survey by AdvaMed indicates that 62 percent of companies contacted intend to cut jobs as one way to offset the effects of the tax. Even if companies have enough confidence in their markets that they try to pass along the tax to their customers, this will produce a further ballooning of the cost of health care — not a reduction, as President Obama promised.

Why was the tax implemented if it has so many drawbacks? Simply put, the tax is necessary to pay for the increased cost of the Obama-devised health care system. One cannot add millions of individuals to the medical rolls without finding some means of financing those increased costs. The medical devices tax is one of the ways of doing that.

Let’s be absolutely clear: The tax is not just a matter of reduced profits, financial worries or loss of employment in the medical devices industry. When manufacturers are subjected to increased taxation as burdensome as this, life-saving or life-enhancing appliances that would have been available to patients are not produced at all, or their production is delayed. This is an unseen cost of the tax that takes the form of increased human suffering by countless patients across the country. Sadly for Americans, the proponents of Obamacare — in their rush to reach the goal of improved health care — have actually diminished health and well-being.

John A. Sparks is dean of the A.J. Calderwood School of Arts & Letters at Grove City College and a fellow with The Center for Vision & Values.

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