Obama's Massive 86% Tax Increase on Medical Device Companies

One of the many taxes in Obamacare is a 2.3% excise tax on medical device manufacturers.  While 2.3% doesn't sound like much, you have to remember that this 2.3% is taken from the revenue line, not the bottom line, magnifying it's impact as net margins for the medical device industry are in the teens. According to the Advanced Medical Technology Association, the industry had $13.7 billion in net income in 2006, paying $3.1 billion in taxes for an effective tax rate of 22.6%.  When this new tax goes into effect, they estimate they will have to pay an additonal $2.67 billion in new taxes.  If you use 2006 values that means that their tax burden would increase by 86% and their effective tax rate would be a whopping 42.1%!  What is worse is that companies will have to pay the tax even if they have no profit.  $600 million of the taxes will be paid by companies that are losing money!   This will have a few major negative impacts:

1. Job losses.  Less profits means less money to go around for employees.  Just what we need, more unemployment!
2. Less investment in medical device companies.  When you try to figure out the value of a potential investment, you look at the net present value of the future cash flows, basically the income after taxes.  If that income dives, the value of that potential investment goes down significantly and you are less likely to invest in it.  This will slow the development of new revolutionary treatments.  Again, just what we need, less innovation!
   
3. Less competition.  Some of the smaller companies, especially those that have no profits and will have to pay $600 million of the excise tax, could be forced to exit certain markets or have to declare bankruptcy.  Do we really want less competition?
   

I'm sure some would argue that medical device companies can simply raise prices.  There are a few problems with this argument.  First, reimbursement for medical devices is often fixed by third party payors, so whether your device costs $25,000 or $2,000, the doctor/hospital receives the same reimbursement. This limits the ability of medical device companies to raise prices since if a hospital or doctor doesn't make money on a procedure they will just do less of them.  So unless reimbursement rates go up as well, many medical device manufacturers are SOL.  Also, there is heavy competition in many spaces so your medical device is one of many and you are constantly seeing price deflation in many major markets, be they coronary stents or ICD's due to this competition.  There just won't be the room to raise prices so medical device companies will have to bear much of the burden themselves.  And finally, even if they did pass on the full cost of the tax, wasn't the point of Obamacare to make the costs of healthcare cheaper not drive them up further? 

It's very easy to take your eyes off the prize with everything that is going on but we need to remember that we have to get rid of Obamacare, one way or the other.