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.
The law is so bad that a test vote last week in the Senate yielded a tally of 79-20 for repeal. Even liberal senators like Amy Klobuchar of Minnesota and Dick Durbin of Illinois voted for repeal. Elizabeth Warren of Massachusetts voted for repeal!
I held a "teach in" on my radio show Monday to try and bring attention to this tax, to the Senate's symbolic vote, and to the very real choice facing the GOP House Leadership.
In studio I was joined by Robert Grant, the leader of a very successful investment fund, Strathspey Crown, LLC, focused on a segment of the medical device world; Thomas Loarie, the executive chairman of Mercator MedSystems, and Gary Wolensky, one of my law partners and a trial lawyer who has spent more than 25 years defending medical device companies in and out of court.
To this panel I added a stream of GOP House members, each one of whom is a member of the House Ways and Means Committee: Diane Black of Tennessee, Lynn Jenkins of Kansas, Mike Kelly of Pennsylvania, Erik Paulsen of Minnesota, and Peter Roskam of Illinois.
To each of these Representatives my guests and I directed pretty much the same question: Could the MDT be repealed and if so how soon? Answers differed on the timing, but all believed repeal could be accomplished this year. Congressman Roskam was perhaps the most optimistic on timing. The transcript of his interview is here. The key answer from Congressman Roskam: "So in direct answer to your question, Hugh, if there’s a decision that gets made, it can happen in a matter of weeks or months."
The problem for some of the others would be finding a "pay for," or waiting for "comprehensive tax reform." A "pay for" is an off-setting increase in revenue to replace the $30 billion the MDT is expected to claw back out of the industry over the next decade, and comprehensive tax reform is just that, a complete overhaul of the tax code. Some Republicans won't do anything to add to the deficit, even repeal a ruinous tax, while others want to wait for the "big deal" to arrive and fix it then.
Both approaches forfeit the momentum of the Senate vote last week, and no one is more aware of that than the two senators who also joined us on yesterday's program: GOP Senate Leader Mitch McConnell and Senator Marco Rubio. The conversation we had with them was very focused and very encouraging to the friends of repeal, and that transcript is here. Both Senators McConnell and Rubio stressed how committed to repeal many key Democrats were and how lopsided the sentiment for killing the job-killing tax.
"I think if the House sent us a stand-alone medical device tax, it’s going to be really fascinating to see all these liberal Democrats figure out how they’re going to deal with it," Senator McConnell said. "And I think the House now, the Senate having voted the way it did, should send us a bill to do precisely that very soon."
Very. Soon. Like perhaps the week of April 9 when the House returns?
This will require a House GOP not known for being nimble to in fact turn from their plans and sprint to the Ways and Means Committee demanding a clean -- a very clean -- bill on repeal. Forget the "pay for" and rush a pure repeal to the Senate for Leader McConnell to attach to whatever he thinks it should be attached to.
It would be motive enough to prove that excise taxes on revenues are crazy, but here the stakes are real jobs and real brain and innovation drain from the country that is occurring in real time. Capital for start-ups is drying up, and the best kind of jobs are finding permanent homes abroad. The House GOP has everything to gain by moving fast and with a huge majority to volley back at the Senate a bill that embodies the Senate's very fresh vote. Republican activists should plead with them not to miss this obvious opportunity.
In this post is a list of every member of the House Ways and Means Committee and the link to their website. Take a moment to send this column with these links to your friends in this or related industry. Tell them now is the time for them to act and not merely complain. The MDT can be repealed, but enough House GOP members must hear enough constituents and voters say "Right now" and mean it.
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