Obamacare Medical-Device Tax Fight: Not Over Yet
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Lourdes Medrano
The Fiscal Times
November 26, 2013

Amid the budget fight that partially shut down the federal government last month, the discussion over whether to repeal a new tax on medical devices imposed by Obamacare fixed the spotlight on a powerful, fast-growing industry.

The medical device industry, which makes everything from artificial hearts and pacemakers to hip replacements and home health monitors, has been booming, thanks largely to demographics. As the U.S. population ages, the demand for medical devices that can extend life and help people manage chronic health problems continues to soar. “The aging population requires more health care procedures, which necessitate medical instruments and supplies, and rising obesity and diabetes rates have boosted the need for devices that address these issues,” analyst Jocelyn Phillips of IBISWorld, an independent market research firm, said in a recent statement.

Related: Doctors Fear Pay Cuts Under Obamacare Coverage

Those trends have driven healthy returns for the industry, allowing it to grow revenue by an average of 1.5 percent a year over the five years through 2012. The manufacturing of medical devices is now a $35.2 billion industry whose revenue is projected to increase by an average of 7 percent annually through 2018 to $49.5 billion, according to IBISWorld. Adding in companies that produce mostly small medical equipment, such as surgical instruments and other medical supplies and the yearly revenue total swells to $126.9 billion. 

Giants such as Medtronic, Inc. (NYSE: MDT), Johnson & Johnson (NYSE: JNJ) and General Electric Co. (NYSE: GE), hold a large share of that market, and smaller companies that specialize in niche products abound, said Anna Son, another analyst with IBISWorld. The biggest players have expanded as the industry has consolidated in recent years, with large companies often acquiring smaller ones that develop innovative medical devices with the potential to bolster the bottom line.

Continuing technological developments should help the industry grow. "A lot of companies are beginning to make devices that are more user-friendly that people can use at home, so that is another opportunity for growth," Son said.

Critics of the medical device tax warn that those innovations could be at risk, along with the industry's profit margins and thousands of jobs. The hotly debated 2.3 percent excise tax went into effect at the beginning of the year and is projected to raise about $29 billion over 10 years as a way to partially offset the costs of expanding health care coverage. The medical device industry has said that some 43,000 U.S. jobs could be lost because of the tax, based on a 2011 study financed by AdvaMed, an industry trade association – and companies will look to outsourcing to offset challenging market conditions, Son said. "It's already costing jobs and significant cuts in research development," said Wanda Moebius, a spokeswoman for the Advanced Medical Technology Association.

The industry has lobbied intensely against the tax, and has won support for repeal from Republicans and many Democrats. In 2012, medical device companies and trade organizations racked up $28.9 million in lobbying expenses, according to the Center for Responsive Politics. Even after last month’s shutdown ended, industry trade groups like the Medical Device Manufacturers Association vowed to keep fighting until the tax “is repealed once and for all.” And as lawmakers continue their budget negotiations, industry representatives are poised to renew their push to undo the tax.

"We're going to continue a grassroots outreach to encourage members of Congress to get this done as soon as possible," said Brendan Benner, a spokesman for the Medical Device Manufacturers Association.

Related: Why Is Congress Fighting Over a Medical Device Tax?

Those who favor keeping the tax say rescinding it would be detrimental to the nation's fiscal outlook and unfair to other industries, including hospitals and pharmaceutical companies, that must also pay for health care reform. "The concern is that if the medical device industry is able to get special treatment through having the tax repealed, then other industries are going to be coming back and wanting to renegotiate things themselves," said Paul Van de Water, a senior fellow at the liberal Center on Budget and Policy Priorities.

Son, the White House and others point out, too, that Obamacare may benefit the industry because expanding coverage to millions of uninsured Americans is expected to boost the number of patients seeking medical attention and devices. And the industry’s complaints about the possible effects have come under heavy criticism themselves. A Bloomberg Government analysis, for example, found that the study claiming more than 40,000 jobs could be lost made “flawed” assumptions and that its findings were “not credible.”

“The tax applies equally to imported and domestically produced devices, and devices produced in the United States for export are tax-exempt,” Van de Water wrote in an analysis last month. That means imported devices wouldn’t be any more attractive than those produced in the U.S. Devices produced here for export wouldn’t be subject to the tax, so that U.S. manufacturers shouldn’t be hurt internationally.

Consumers may not feel much pain from the tax either, Van de Water wrote: “Spending on taxable medical devices represents less than 1 percent of total personal health expenditures, so a small increase in their price would have an almost imperceptible effect on health insurance premiums.”

Even with the excise tax and tightened regulations, including stringent Federal and Drug Administration rules for device approval, the industry will experience healthy growth in the next five years, Son said. Some 3,500 industry professionals from the U.S. and abroad were similarly optimistic in a January survey by Emergo Group, a consulting firm. Nearly 64 percent of American respondents described the tax as having a negative impact on business, though. Most respondents said they would seek to lower production costs without layoffs, but consumers would have to pay more for devices.

Regardless of the tax's fate, the interest in devices is unlikely to fade as technological advances and medical progress allow aging patients to live a fuller life. The cardiovascular, neurological and orthopedic device segments are most likely to benefit, analyst Son noted.

By 2030, the number of people 65 and older will double to about 71.5 million and reach 86.7 million by 2050, according to the Census Bureau. As baby boomers, born between 1946 and 1964, and their parents get older, medical devices will play an integral role in daily life, said Jane Mohler, co-director of the Center on Aging at the University of Arizona in Tucson.

For instance, Mohler said, devices now in use monitor a person's movement to detect falls and emit an alarm for help. Now, the challenge is to develop devices that accurately detect falls before they happen to prevent serious injury to frail seniors who often live alone. "There are all sorts of strategies we can build in living environments to help people maintain their independence and support them through medical technology," she said. For medical device makers, that’s the challenge and the opportunity.

Follow Lourdes Medrano on Twitter @_LourdesMedrano

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