Much of the political conversation in Washington these days concerns innovation, job creation and competitiveness. But talk is cheap, and elected officials must enact policies that enhance economic activity and job creation. The medical device industry is an example of Washington doing exactly the opposite.
Medical device manufacturing is one of the nation's most dynamic and vibrant industries. The United States is the global leader in medical technology innovation, and it is one of the few major industries with a net trade surplus. This industry is responsible for more than 400,000 American jobs—and is indirectly responsible for almost two million more that supply and support this highly skilled workforce. Most important, its products are essential elements of modern medical care. They include everything from CT scanners and pacemakers to blood pressure cuffs and robots used by surgeons.
Yet instead of protecting this paragon of American ingenuity and innovation, the Obama administration and Congress have viewed the industry as a cash cow from which they could milk profits to help pay for the president's health law. So they added to the Affordable Care Act a 2.3% excise tax on medical devices that will take effect at the beginning of 2013.
This tax is especially pernicious because it is assessed on sales, not profits. To put this in perspective, imagine that you've manufactured medical devices and had sales of $1 million, after all your costs and expenses—everything from materials and labor to research and development—your profit was $100,000. The excise tax would be $23,000, wiping out almost 25% of your profits.
Many medical device companies have to ramp up sales before they become profitable. Due to the long, draconian and sometimes unpredictable regulatory process that must be negotiated before a product can be sold, it can take from $70 million to $100 million in total sales before these businesses make their first cent of profits. Nevertheless, they would have to pay the excise tax on their revenue.
The nation's medical device industry is vulnerable. It is not comprised of behemoths: 80% of its companies have 50 or fewer employees, the very businesses we are relying on to turn the U.S. economy around. The new excise tax comes when regulatory delays and uncertainty are increasing, and as many device firms are shutting down or moving abroad to take advantage of the more favorable tax and regulatory climate in Europe. The tax will force companies to lay off employees, cut back on research and development, or diminish capital investment.
The governors of five prominent states—Tom Corbett of Pennsylvania, Mitch Daniels of Indiana, Nikki Haley of South Carolina, Robert McDonnell of Virginia and Scott Walker of Wisconsin—agree. "As governors of states with a significant concentration of medical technology manufacturers, we believe that this tax could harm U.S. global competitiveness, stunt medical innovation and result in the loss of tens of thousands of good-paying jobs," they wrote in an April 30 letter to congressional leaders.
Anticipating the excise tax, several companies already have announced layoffs or withheld investments. Recent surveys show that medical technology executives are examining a host of other undesirable options, including passing along the added costs through price increases. Even if the market would tolerate that—which is surely questionable given the current pressure to drive down costs—it would, ironically, raise the costs of medical care. That was not supposed to be an outcome of ObamaCare.
The U.S. remains the global leader in medical device development and manufacturing, although reports from PricewaterhouseCoopers and others show that its lead is tenuous, in part due to regulatory uncertainties and dysfunction that thwart innovation. If we allow foreign competition to seize the lead, it will be difficult to regain.
We need to create a more nurturing entrepreneurial climate, one in which ingenuity and innovation are rewarded, not penalized. Legislation has been introduced in both the House and Senate to repeal the medical device excise tax. That would be a good start.