America’s Critical Medical Device Industry Gets A Needed Tax Cut Henry I. Miller and Erik Paulsen
Medical devices may not be as glamorous as blockbuster drugs, but they include some of the genuine miracles of modern medicine: pacemakers, artificial joints, replacement heart valves, scanners, and cancer radiation-therapy machines. The U.S. has been the global leader in medical devices, one of the few major industries that both boasts a net trade surplus and is a job creator. The sector employs 400,000 Americans directly and is indirectly responsible for almost 2 million more that supply and support the highly skilled workforce. Most important, its products are essential elements of modern medical care, including everything from CT scanners and pacemakers to blood pressure cuffs and robots used by surgeons.
But Washington politics has put this made-in-America success story at risk. For years, the medical device industry was ravaged by unwise public policy, including a devastating 2.3% excise tax that took effect at the beginning of 2013 as part of ObamaCare. It was included largely as an afterthought with little debate or consideration, as one of a grab bag of taxes, fees and fines used to finance the law’s litany of new spending programs.
After a decade, the omnibus spending bill just approved by Congress and signed by President Donald Trump has finally relegated the device excise tax to the dustbin of history.
The tax, which required the payment of billions of dollars by device manufacturers, was especially pernicious because it was assessed on gross sales, not profits. To put this in perspective, imagine that you’re a manufacturer of medical devices and had a profit of $100,000 on sales of $1 million after all your costs and expenses for everything from materials and labor to research. The excise tax would be $23,000, wiping out almost a quarter of your profits.
Think that example is extreme? Well, Signus Medical, a small Minnesota company that makes cutting-edge devices used in spinal surgery, ended up paying an effective tax rate of 79%.
Many medical device companies have to ramp up sales before they become profitable. Due to the long, draconian, and sometimes unpredictable regulatory process that must be negotiated before a product can be sold, it can take from $70 million to $100 million in total sales before these businesses make their first cent of profits. Nevertheless, they would have to pay the excise tax on their revenues.
The nation’s medical device industry is vulnerable. It is not comprised of behemoths: 80% of its companies have 50 or fewer employees, and they are the very businesses we are relying on to keep our economy humming. The new excise tax arrived at the same time as increased stringency and delays at both the FDA and the U.S. Patent Office, and at the same time that many device firms are shutting down or moving abroad to take advantage of the more favorable tax and regulatory climate in Europe. The tax forced companies to cut back on research and development, reduce capital investment, and lay off employees –at Stryker, Medtronic, Teleflex, to name just a few.
Much of the cost of the tax has been passed along to the consumer – ironically raising the costs of medical care. That was not supposed to be an outcome of ObamaCare.
Thankfully, in the midst of today’s Washington circus of dysfunction, the medical device tax has been relegated to a historical footnote. As a member of the U.S. House from 2009-2019, one of us (Rep. Paulsen) worked for years to educate other members of Congress about the harmful impacts of the tax and was able to rally strong bipartisan sentiment for repeal. And as part of the omnibus spending package passed by Congress, and signed by Trump on Dec. 20, it has been permanently repealed – an acknowledgement that the tax was harmful to investment in research and development on innovative products.
While the U.S. remains the global leader in medical device development and manufacturing, competition is fierce. Various analyses show that even without the excise tax, America’s leadership in this sector is tenuous, in part due to regulatory and reimbursement challenges that also thwart innovation and discourage new investment.
The medical device excise tax offers a case study of how bad policy, poorly thought out and hastily jammed through Congress, can seriously harm a critical sector of our economy and the jobs it supports. It also shows the difficulty of undoing misguided federal policy once it is enshrined in law.
Chief Justice John Marshall once wrote, “the power to tax is the power to destroy.” That dictum was as true in 1819 as it is today. As lawmakers work to shape and reshape federal policy, they would do well to remember it. A seemingly minor provision in a 2,000-page bill very nearly upended an entire industry critical to the health and prosperity of millions of Americans. It’s an example we should learn from and resolve never to repeat.
Miller, a physician and molecular biologist, is a senior fellow at the Pacific Research Institute. He was the founding director of the FDA’s Office of Biotechnology. The Hon. Erik Paulsen represented Minnesota’s 3rd congressional district in the U.S. House of Representatives from 2009 to 2019.
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