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Tax Within a Tax: ObamaCare Medical Device Tax a Death Sentence for American Medical Innovation, Jobs

The Supreme Court ruled in June that ObamaCare is constitutional because it's one big fat tax, however, ObamaCare is actually one big tax with many taxes within. Take for example the medical device tax that is part of ObamaCare. This tax increases the costs on companies that manufacture vital medical devices ranging from basic doctors visits to heavy duty surgeries such as knee replacement.


Under the Affordable Care Act, the Obama administration's signature health care reform law, medical-device manufacturers will pay a 2.3 percent tax on sales of such products starting in 2013. That tax will affect everything from surgical tools to oxygen tanks to wheelchairs. It is one of several features of the law designed to raise money to cover the uninsured -- it's expected to raise an additional $20 billion by 2019.

And guess what? These costs hit seniors and Medicare the hardest.

But experts say that the tax could have a particularly big impact in the world of knee and hip replacements. Such operations increased more than 26 percent to more than 1 million procedures in the U.S. between 2005 and 2010, according to the American Academy of Orthopaedic Surgeons; the total bill of the hospital stays for such surgeries was about $60.5 billion in 2010. And with the American population hitting retirement age in record numbers, demand is likely to surge: The number of knee replacement procedures alone is expected to increase 673 percent, to nearly 3.5 million, in 2030, according to a study presented at the annual meeting of the orthopedic academy.

At the simplest level, some critics of the tax estimate that the expense could add hundreds of dollars to the cost of each joint-replacement procedure, as the manufacturers of the joints pass the cost along to patients. "By having taxes that go into effect for health care companies, you're actually increasing the cost of health care in the country," says Dave Blaszczak, senior health policy analyst at the nonpartisan Potomac Research Group, which provides government and economic analysis to institutional investors.


But not only does this tax increase costs on companies, it also increases costs on hospitals, doctors and people in need of medical treatment that requires medical devices to be used. As a consequence of this, biomedical or medical device engineering firms are already laying off workers who develop crucial medical products due to the "unforeseen" costs, or in other words, the costs of ObamaCare. Not to mention, the more money these companies pay to the government, the less money they have to invest in research and development.

Medical-device manufacturers contend, however, that the potential problems go much further. While the tax may seem relatively small -- it would amount to $230 on the sale of a $10,000 medical device -- opponents note that it hits sales, not just profits, which increases its impact. Indeed, several medical companies say that the surcharge would eat into their profitability, at the expense of their research and development budgets. Large orthopedic device maker Stryker says that in anticipation of the tax, it plans to cut more than $100 million from its annual pretax operating costs next year. Smaller device maker Zoll Medical says the new surcharge will raise its overall rate above 50 percent and use up its entire R&D budget.

Americans for Tax Reform provides more on the lost jobs numbers and the costs of the medical device tax:

 A bipartisan outcry has been raised over the device tax, and for good reason. The tax was enacted to help fund the $1.76 trillion in new spending authorized under Obamacare, and it will actively undermine production of and improvement on medical devices which are crucial to patient outcomes.

The device tax is a tax on gross receipts (sales, essentially) instead of a tax on profits, so the tax will be imposed even if a company sells its products at a loss. This one detail ensures that the 2.3% tax is deceptively large: the medical device industry’s tax burden is expected to double because of the Taxmageddon increase; some companies (such as Zoll, which manufactures defibrillators) will see their profit margins shaved by up to 40%.

A recent study found that investment in medical research and development will fall by $2 billion per year because of the device tax—and that is a cautious estimate. R&D dollars drive innovation and innovation lowers costs, so the tax’s adverse effect on investment will keep expensive medical devices from becoming affordable and widely available in the future.

More immediately, the device tax will gouge health consumers for essential products. Taxes on companies often end up hitting consumers as higher prices, and the device tax is no different. The actuary for the Centers for Medicare and Medicaid Services made it plain that Obamacare’s “fees and the [device] tax would generally be passed through to health consumers in the form of higher drug and device prices and higher insurance premiums.” In other words, patients – many in dire need of care – may find crucial medical products out of their reach as a result of the 2.3% tax.

Whatever costs cannot be passed along to patients will be absorbed by the medical device companies, which will lead businesses to cut jobs as they tread water to stay afloat. One study found that, depending on the elasticity of the tax, the medical device industry will be forced to fire between 14,500 and 47,100 workers—up to 10% of the workforce.


With this new medical device tax, students who pay large sums of money to get degrees in the field of biomedical engineering, just like doctors, will no longer see the benefits of going into the field and therefore, we will have a shortage of engineers developing new medical device technology. The medical device tax is a death sentence for American medical innovation.

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