By Attorney Jonathan Emord
Among the provisions in the Patient Protection and Affordable Care Act (Obamacare) that promises to wipe out an entire industry is a 2.3% excise tax on medical device companies. That tax, now in effect, is imposed on gross receipts, not net profits. The tax is now devastating a market characterized by small and mid-sized firms who can ill afford the tax. Medical device companies invest a considerable amount of their profits in research and development, either to invent new technologies to improve patient care or to amend existing technologies in ways that improve patient comfort or medical outcomes. We are about to witness a mass exodus of medical device companies off shore or out of business. We are also about to witness the demise of several medical device companies and, with them, vital technologies used by physicians to help patients. The beneficiaries of the tax reside off American shores. Foreign medical device companies will now experience a market boom as they exploit the market losses that American firms accumulate as a result of this onerous excise tax.
Most medical device companies employ 50 or fewer employees. Most gross less than $5 million per year. For a $5 million medical device company, annual profits of $200,000 are not uncommon. Consider how the 2.3% excise tax works. If a medical device company grosses $5 million but nets $200,000 in profits, the 2.3% excise tax adds to the company’s burden a whopping $115,000 in taxes atop federal, state, and local taxes. That $115,000 Obamacare tax is equal to 58% of profits.
Year after year this excise tax is going to hammer medical device companies into oblivion. Once one of the jewels in the American free market, medical device makers are about to bolt America in the same way that wealthy individuals and businesses are now leaving in droves from California.
Think about just how many different medical devices are used in patient care. Literally thousands of devices are a part of modern medical practice, from tongue depressors to head mounted lamps and cameras used in surgery to MRIs, CAT scans, and PET scans. The entire device industry is now laboring under one of the most draconian tax burdens in history. Major medical device companies are forced to avoid new hires, acquisitions, or necessary research and development. All other medical device companies are forced to terminate employees, cut research and development, hunker down, go out of business, or flee the United States.
Within a few years, physicians and patients will come to realize the horrific effects of this tax. Physicians will be alarmed to learn that certain devices are no longer available. Patients will become alarmed when a procedure that could be less intrusive, more effective, and less painful is not available and that an alternative procedure must be used carrying with it greater injury and less efficacy. This single aspect of Obamacare promises to undo one of the great miracles of the free market. Within the last decade medical device innovations have extended the human lifespan, reduced the debilitating effects of disease, and decreased human suffering. As they disappear, the opposite effects will recur.
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