Think Chinese Tariffs Are the Only Industry Job Killers? Think Again

Much of the past year has been dominated by anxieties about the impacts of Chinese tariffs on medical technology costs and the supply chain. These anxieties are warranted—it is difficult to imagine a C-Suite executive of a global company (regardless of size) that hasn’t lost at least some sleep over Chinese tariffs. These duties have impacted profits and triggered concerns about the ability to compete competitively in a global environment.

One of the latest concerns—arising from an old issue—is the medical device tax, which could return next year without legislative intervention before then. A provision in the Affordable Care Act, the levy imposed a 2.3 percent excise tax on the price at which a qualified medical device is sold. The tax is based on product price rather than total units sold, and was enacted as part of the plan to pay for Obamacare.

Why be concerned now? In successive bouts of “sanity” in Washington, the medical device excise tax (MDET) was temporarily suspended twice (each time for two years) starting in 2015 through December 2019. Unless lawmakers come to their senses again and either suspend the levy or fully repeal it, the industry could be hit with a significantly higher tax bill next year, courtesy of its own government.

With less than three months remaining in the year, C-Suite executives are probably already running impact scenarios for fiscal 2020 to determine the ways the MDET could potentially affect profits and medtech innovation. What is particularly distressing about the MDET is that it is not a levy on industry profits but rather a tax on productivity—i.e., product value—which essentially amounts to a sales tax on output. Anyone with a basic understanding of economics knows that when something is taxed more, there is less of it. Therefore, the pending concerns about the MDET involve lower profits, fewer R&D dollars, and stagnant innovation.

A July 2018 report from the independent Tax Foundation (established in 1937), came to the following conclusions about the MDET:

1. The levy violates the principles of good tax policy since it’s not consistent or evenly applied, and it gives high-margin businesses an advantage over lower margin entities. To illustrate this point, the report cites two hypothetical medtech firms, each of which have $1 million in sales, and discusses the uneven impact the tax would have on these two companies. Upon applying the MDET, one of the firms would remain profitable but the other would lose money, specifically in “after-tax” profits. While this obviously will affect business operations and revenue, it also clearly shows (as a starting point) the MDET’s unequal and inconsistent impact on American medtech firms.
2. The MDET is complex; thus, there is a high compliance cost that disproportionately affects smaller businesses. “Complying with the tax is difficult because medical device companies are often vertically integrated, which means that they both produce and distribute goods,” the report states. “The vertically integrated firm must create an artificial wholesale price before selling in order to collect the tax. The complex distribution channels within the health care industry make this even more difficult to comply [with] and administer than other excise taxes.” Also complicating compliance is the U.S. Treasury Secretary’s authority to exempt items from the MDET: Medical device kits, for example, contain both taxable and non-taxable items.
3. The MDET will raise costs to consumers, though the levy is largely hidden from the general public. “Unlike retail sales taxes, the [medical device] tax is not visible to the consumer at purchase. And even if consumers are aware of the tax’s existence, it isn’t always clear where the price of a medical device is impacted by the tax,” the report notes. “For instance, items made in a dental laboratory would be generally exempt from the tax, but inputs used in the labor could be subject to the tax, raising the final costs.”.
4. Companies could reduce expenses by cutting jobs. The medtech industry lost more than 20,000 jobs from 2013 to 2015 during the tax’s first implementation. Device manufacturers had little choice then but to trim personnel to maintain minimum levels of expected cashflow and profitability.

There is more information in the Foundation’s report, but it warns the MDET could have a significant impact on the U.S. medtech industry if the levy is reinstated.

“The medical device tax is an economically flawed tax, which raises prices for consumers, lowers job opportunities, and results in less investment in the industry,” the report’s authors conclude.

“Research on the period when the tax was in effect shows that R&D spending decreased, which could lead to less innovation on needed medical devices. The tax has also led to approximately 22,000 fewer jobs from 2013 to 2015. Ideally, Congress would repeal the tax in its entirety, but short of that, Congress should work to make the tax suspensions longer than two years to allow firms adequate time to plan.”

AdvaMed is taking a positive approach to the debate (though its intent is the same). Touting survey results of its members, the organization emphasizes the following key points about the possible benefits of a full MDET repeal:

• Seventy-one percent of companies would reinstate previously foregone hiring;
• Eighty-five percent of companies would reinstate previously foregone R&D projects; and
• Approximately two million medtech industry jobs would be stabilized.

Maintaining an upbeat spin on the advantages of a potential MDET repeal, an American Action Forum study found a net positive gain of more than 50,000 jobs within three years of a full MDET repeal.

The medical technology industry in the United States has traditionally been one of the net positive producers of new manufacturing and R&D jobs (even with offshoring occurring in the supply chain). This leads to a basic but fundamental question: Why would Congress tax an industry that has become such a prolific employer?

There obviously are various answers to that question, from both sides of the partisan aisle. But that is not the intended purpose of this discussion. There are bipartisan resolutions lingering both in the U.S. House of Representatives and the U.S. Senate to either further suspend/delay the MDET’s implementation; or repeal the tax altogether.

While many in the industry are rooting for the latter, we will accept the former. Although the United States has benefited from an historic run of job growth and prosperity, most American families still live pay check to pay check. As previously mentioned, when the tax was previously implemented, some U.S. jobs were eliminated or moved to foreign countries. We sincerely don’t wish a job loss on anyone again—especially due to a poorly conceived tax that is inequitable and counterproductive to the industry it impacts.

With the fourth quarter of 2019 upon us, let’s hope all this discussion about the device tax’s possible return is a moot point. However, considering how slowly and nonsensically Congress has worked on important issues, we are concerned the MDET will still be a lingering topic of concern for this industry, the C-Suite that runs it, and the hard-working Americans who make it all work.

Those in the medtech industry who are not already involved with their local Congressional representatives on this topic should make their voices known before the next recess (which likely is soon based on legislative calendars).

Bottom line: Let’s not let this “self-inflicted” tariff affect the future of the U.S. medtech industry. For soccer (Futbol) fans, this is somewhat similar to an “own goal” in the ongoing global trade wars. America has enough to be concerned about globally without having to further erode its ability to compete in the worldwide marketplace.

Let’s continue to make this industry a net positive producer of economic benefit in the United States. Medical technology already has a net positive impact on patients through the products it provides. A repeal of the MDET will only enhance the value of that impact via innovation, R&D, and perhaps most importantly, improved health for future generations. 

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Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She is currently is CEO at MedWorld Advisors and can be reached at [email protected].

Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now a Managing Director at MedWorld Advisors. He can be reached at [email protected].