The Wall Street Journal published an opinion by Evan Bayh, former governor and U.S. senator from Indiana and partner at McGuireWoods LLP, that provides three key points on the impact of the 2.3 percent tax on the medical device industry.
- No Additional Volume. The 2.3 percent medical device tax, which will take effect in January 2013 as part of the Affordable Care Act, was enacted under the theory that medical device companies’ sales would surge after patients newly insured by the Affordable Care Act poured into the healthcare system. The theory, however, ignores the fact that the vast majority of medical device consumers are already covered by Medicare, Medicaid or private insurance. The additional volume will be unable to offset the $30 billion the Congressional Budget Office estimates the tax will cost the medical device industry.
- 15 Percent Tax on Profits. The 2.3 percent medical device tax will be charged to manufacturers on the gross sales of the medical device company, not its profits. A 2.3 percent tax on gross sales equates to a 15 percent tax on the profits of every medical device company. A 15 percent tax on profits combined with a 35 percent corporate tax rate and state corporate taxes would increase the tax rate for medical device companies to more than 50 percent in most jurisdictions.
- Layoffs Looming. This severe hit on the medical device industry already has many companies announcing layoffs, cancelling plans for domestic expansion or slashing research-and-development budgets. In Bayh’s home state of Indiana, Cook Medical has canceled plans to build one new U.S. facility in each of the next several years, and Zimmer plans to lay off 450 workers, while Hill-Rom expects to lay off 200 workers. Bayh urges Congress to act soon to curtail most of the harm that will be caused by this tax. In the House, 233 Republicans and 37 Democrats voted in June to repeal the tax. In the Senate, only 33 Republicans are on record in support of the repeal.