Of all the many awful features of the Affordable Care Act --"Obamacare"-- the medical device tax ("MDT") is the most obviously ruinous of a particular sector of the economy.
More than 8,000 firms in the United States are at work on such devices, from artificial hearts to sight-saving eye technologies to low tech bandages and surgical screws. More than a half million people work directly in this sector, in great jobs that value engineering and other high-skills sets and which produce annually thousands and thousands of patents that lead to worldwide innovation in health care and in cost savings in the prevention and treatment of disease.
The average time it takes for an idea to become a licensed-to-sell device in the U.S. is 12.4 years. That average path to market requires an investment of about $100 million. The inventors and investors hope that when the revenues arrive they can, under the protection of patent, make back that revenue and more so that profit can be made and new innovation begun.
The MDT slapped a 2.3% excise tax on this industry's revenues -- not profits -- a tax that kicked in this year, a tax that targets research and development dollars with particular zeal. Many of the devices are price controlled and cannot pass on the cost to the customer while others simply exist in an environment where price increases are not an accepted practice. The prices of medical devices tend to decline year-to-year, not to increase. Only innovations really allow for price increases.
But the tax must be paid and thus it is paid from the only place where discretionary dollars can be found, typically, a research and development budget, which in most established companies is between 5% and 10% of total revenue. (Nearly all of the budget for start-ups which relay on venture capital of one sort or another for their funding can be termed R&D.) Since about half of the R&D for established companies must go simply to maintenance of the existing product line, the dollars available to launching new products is between 2.5% and 5% of a company’s revenues. The MDT simply drains huge chunks of that from the big companies while sitting like a vulture atop any revenue stream the start-up eventually generates, long before the start-up dreams of turning a profit.
I repeat: The tax is on revenue, not profits. It is a company and job killer. It is no wonder why the Prime Minister of Ireland was in the Silicon Valley last week urging medical device entrepreneurs to come set-up their shops in Eire. It is hard to be a worse place to do business than the U.S. if you are a start-up in the medical device world.