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Sunday, September 13, 2009

The health care "reformers" go after medical technology 

[Bumped all day Sunday. Scroll down for more recent posts.]



As we have long predicted on this blog, the health care "reformers" propose to finance at least part of the "savings" or new benefits -- it is impossible to know which -- by decreasing the rate of return on medical technology. There are many ways in which this might be done, but the Senate Democrats are proposing to do so directly, by levying a "value added tax" on medical device companies according to their proportion of U.S. sales. This tax would be without regard to profitability, so it would amount to a capital tax on start-ups and a massive income tax surcharge on profitable companies, varying as net margins do. In the case of my own mid-sized company, the tax would be the equivalent of a roughly 20% surcharge on our net income (in all likelihood raising our economic tax rate well above 50%) or 50% of our research and development budget, depending on how you want to look at it.

Any way you look at it, the proposed tax is a calculated effort to divert capital from the medical technology industry to other uses in the economy, because new medical technology drives costs that are now going to be assumed by the government (or at least will be if the Senate leadership gets its way). Of course, innovative medtech also extends and saves lives, and makes them more comfortable and more productive. Which is, after all, the point of medicine.

Our industry association, ADVAMED (which not surprisingly is not fighting the Obama administration on the concept of reform), has distributed some talking points, and created on an online form that you can use to express your displeasure to your elected representatives. I've reproduced the talking points below, and hope that you click through the link and make your opinion known. Even if you support health care "reform" and the attendant massive new expenditures, should not the financial burden be spread across the economy rather than specifically trashing the incentive to innovate new medical technology?

Medical Device and Diagnostics Value Added Tax



The Senate Finance Committee is contemplating a $40 billion excise tax on medical device and diagnostics products.  AdvaMed strongly supports the Committee's health care reform efforts and has worked cooperatively with Congressional leaders to advance the goals of health care reform; however this medical device tax is bad policy that AdvaMed opposes. 

It is our understanding that the proposed tax would be levied upon all manufacturers of medical device and diagnostics products as defined by the Food Drug and Cosmetic Act.  Under that definition, as many as 80,000 products currently sold in the US would be taxed ranging from toothbrushes to eyeglasses to condoms to stethoscopes to syringes to blood pressure monitors to hospital beds to artificial heart valves to pacemakers to advanced diagnostic equipment.   The tax would apply regardless of the size of the company or their profitability.  Recent independent estimates indicate annual domestic sales of these products at approximately $131 Billion.  A domestic market of that size would require a tax rate of roughly 3.1%, which, depending on the company, would be roughly the equivalent of a 10-30% income tax surcharge.  Such a rate would dramatically increase the overall effective rate of manufacturers, and, in turn, constrain resources used for research and development, investment in physical manufacturing capacity, and jobs.

The excise tax on medical products is bad policy.


  • The tax will raise health care costs. It would be assessed against thousands of products ranging from eyeglasses to stethoscopes to a hospital beds to artificial heart valves to advanced diagnostic equipment. Such a tax would in turn increase costs for consumers, physician practices, hospitals, and patients.. While on paper it may help balance a Congressional Budget Office scorecard, the real effect will be to raise health care costs-exactly the opposite of a key goal of health reform.



  • This tax is counterproductive and burdensome for patients. Much of this $40 billion tax will end up being passed on to patients, especially patients who are the sickest and need complex, high cost technology. It does not make sense to finance health reform by taxing the countless products necessary to treat every patient who walks through the doors of a physician's office, hospital, or nursing home. Bearing the burden of illness is tough enough on patients and their families; but to financially penalize patients for their efforts to get better seems particularly wrong.



  • Medical device and diagnostics companies will be contributing as a result of other parts of the health care reform bill, and this tax amounts to a double hit for one industry. The device and diagnostic industries are not generally paid directly by the government, insurers or patients. Instead, we are suppliers to providers who are paid for services. The hundreds of billions of dollars in cuts in the bill for device and diagnostic industry customers like hospitals, nursing homes, clinical laboratories and home health agencies will be passed on to our industry roughly in proportion to our share of their costs. Loading a special device and diagnostic tax on top of the cuts that will already hit our industry is unfair.



  • There is no device and diagnostics industry windfall from healthcare reform. Proponents of the tax argue that the device industry will benefit from expanded coverage by gaining additional customers, and the excise tax is a fair way for the industry to repay some of this windfall. This argument doesn't hold water. The device industry benefits less from expanded coverage than most other segments of the health care industry, since the newly insured are, on average, younger, healthier, and relatively low users of devices relative to other types of medical care. Companies making products used for the Medicare population will see reduced revenue growth as hospitals react to the substantial Medicare cuts in the bill. On the flip side, these same companies will see only limited volume increases because their patients are mostly over 65 and already insured through Medicare.



  • The medical products tax places an unfair burden on small businesses. Small businesses are the backbone of the device industry and the source of many of the most novel, cutting edge new treatments and cures. There are more than 6,000 medical device companies in the U.S. Less than 5 percent have sales of over $100 million annually. The tax will hit these small companies especially hard, since some have no profits and almost all rely entirely on domestic sales for their revenues.



  • The medical products tax ignores the impact of health system reform on the device industry. The device industry is highly competitive and has kept prices quite low. Overall, prices for devices and diagnostics have increased at one-quarter the rate of other medical prices and one-half the rate of the consumer price index. The device industry supports reforms that will have a substantial impact on utilization of its products and on its contribution to health costs, including value-based purchasing, pay for performance, comparative effectiveness research, preventive health and other measures to change the incentives in the system toward quality and efficiency. In addition, devices have high costs of production. A gain in volume adds up to a much smaller gain in profits. A $4 billion a year excise tax may account for as much as one-sixth of total industry profits, which will have a significant dampening affect on funding available for future research and development.



If you agree, please tell your Senators and Representative to stop trying to take the profit out of new medical technology.

37 Comments:

By Blogger Stephen, at Sat Sep 12, 08:07:00 PM:

Thanks for the post. I just emailed my senator.  

By Anonymous Anonymous, at Sat Sep 12, 09:56:00 PM:

Looks like they're serious about cutting 'overhead'  

By Blogger Assistant Village Idiot, at Sat Sep 12, 10:47:00 PM:

Done.
They always believe that there is someone out there somewhere who is making money by gouging the rest of us. To most Democrats, and an unfortunate number of populist Republicans, it is not only allowable, but a positive moral good to identify these people and make them pay something back to the rest of us.

One level deeper, it is an extension of the animosity toward the unseemliness of making money in business or "in trade," as the British elites used to say. Government is seen as "public service," the helping professions, academia, advocacy, and the arts are seen as inherently noble professions which contribute to the public weal. Commerce is seen as inherently ignoble, leading to a net loss to society.

Such ideas must be pulled out root and branch.  

By Anonymous Anonymous, at Sun Sep 13, 01:00:00 AM:

When you want less of something, you tax it heavily.  

By Blogger UNRR, at Sun Sep 13, 07:52:00 AM:

This post has been linked for the HOT5 Daily 9/13/2009, at The Unreligious Right  

By Anonymous Anonymous, at Sun Sep 13, 09:40:00 AM:

Hey, TH, just wait until the payment for medical devices is based on a given pool of medical device money divided by the number of devices sold. Sell twice as many next year, the pool of money increases by 1/2%, the device is reimbursed at 50%. These bureaucrats know how to run a business, eh, run folks out of business.  

By Anonymous Anonymous, at Sun Sep 13, 09:44:00 AM:

I want to know which Senator on the finance committee came up with this ridiculous scheme! This goes against the basic principle of free market enterprise. A tax on innovation--Obama will LOSE my vote if this passes!  

By Blogger TigerHawk, at Sun Sep 13, 11:03:00 AM:

Max Baucus, I believe.  

By Anonymous Anonymous, at Sun Sep 13, 12:15:00 PM:

But we're not raising taxes on people below $200,000 ... not one single dime!

Link, over  

By Anonymous Anonymous, at Sun Sep 13, 04:20:00 PM:

TH, I've been waiting for you to start writing about the impact of the Obama administration on R&D in medical devices, biologics, and pharma. I am a patent attorney so I have a particular interest in government policies which affect research and development and innovation.

The mind boggles when, as in health care, government policy categorizes live-saving technology advances as a problem which must be curtailed.

Americans may spend more on health care than other countries, but we also obtain better outcomes in most treatments precisely because of treatments available in the U.S. from technological advances.

However, government accounting only counts costs, not benefits. In the eye of a socialized medicine bureaucrat, medical R&D companies like yours are part of the problem, not the solution. Make no mistake, the intent of Obama's program is to put may companies like yours out of business. Your taxes will increase and your revenues will decrease as government bureaucrats reduce reimbursement rates. The resulting margin squeeze will drive many medical products and pharma companies out of business. This is all part of the plan.

The board of any medical products company should be making contingency plans to relocate the company outside the U.S. if Obama's health plan passes.  

By Anonymous Anonymous, at Sun Sep 13, 05:13:00 PM:

Hold on! The VAT suggestion has been made by DEMOCRAT Senators. That usually means it is a request for bribes, kick backs and payoffs by the targets.
Why should Dodd, Rangel, Pelosi and Obama's wife be the only ones making convenient cash from earmarks and influence?
How about a couple of thousand shares of stock in the next 20 IPOs for each of the children and grandchildren of every Democrat Senator. Should be easy to hide and aught to put this issue to rest, at least for a while. My preference would be to start with Franken.  

By Blogger davod, at Sun Sep 13, 05:39:00 PM:

I keep reading about the cost of these, and other, taxes being passed on to the consumer.

Obviously you are not waiting for the other shoe to drop. This is a radical left wing administration, supported by a very left wing Congressonal leadership.

Price controls may be on the horizon.  

By Anonymous Anonymous, at Sun Sep 13, 06:06:00 PM:

We may see VAT taxes on a whole host of things. Liquor and cigarettes have long been a favorite target.

If so, there'll be a lot of politics of what gets covered and what doesn't. Once again, a good lobbyist is your highest ROI

Link, over  

By Anonymous Thrasymachus, at Sun Sep 13, 06:37:00 PM:

Hey, your're the guys who figured that getting behind Directive 10-289 would be good for business.

Your're the guys who hired your own Tinky Holloway to trade some favors to come out ahead.

Now you're angry that the Unification Board is double-crossing you?

There's the bed. Time to lay down on it.  

By Blogger Scott, at Sun Sep 13, 09:25:00 PM:

Why would writing to congress do any good? They are managing to ignore 1.2 million marchers on their doorstep.  

By Blogger David, at Sun Sep 13, 11:13:00 PM:

Truly insane. Real madness.

Question: How would this work for *imported* medical devices? If they drive Medtronic out of business and Siemens picks up the slack, would pacemakers made in Germany but sold in the U.S. be taxed at the same rate as ones made in the U.S.?  

By Anonymous marvls, at Mon Sep 14, 06:46:00 AM:

Brutal! Just a brutal and ham-fisted approach to health care that is already on display elsewhere. The results are predictable. New and worthy devices will be much more expensive to develop and sell. Fewer citizens will have these devices available to them, either by pricing or wait list rationing or both. Simple and predictable.
As an early stage developer of a novel orthopedic device to treat arthritis I can see the writing on the wall should the Democrats prevail. After all, I am a Canadian and a surgeon. There is no free lunch and when it comes to health care, ultimately politicians care about cost, not quality of care. You're getting the "Change" that was promised but the "Hope" is a non-starter. Very sad.  

By Anonymous Edward Lunny, at Mon Sep 14, 09:06:00 AM:

These taxes wouldn't be neccessary if they just collected all the taxes that have gone unpaid by the likes of Rangel, Geitner, Daschle, Sebelius, et al. The entire cost of "healthcare reform" might well be covered. Hell, with the fines and penalties we might be able to retire the national debt.  

By Anonymous Brian, at Mon Sep 14, 09:06:00 AM:

The wife just pointed out that a little truth in advertising is in order.
The effort to re-brand health care destruction as health care reform needs to be addressed directly.

Not only is this health care destruction but those who propose it are vandals intent on plundering what should arguably not have been labeled an industry to begin with.
"Just words" have granted others undue access and control of a fundamental requirement for survival much as has happened with food, shelter and clothing.
Wresting control of the dialog back from the vandals should be of the highest priority.  

By Blogger Colin, at Mon Sep 14, 09:23:00 AM:

Sorry, Avamed lost me here:

"AdvaMed strongly supports the Committee's health care reform efforts and has worked cooperatively with Congressional leaders to advance the goals of health care reform; however this medical device tax is bad policy that AdvaMed opposes."

They decided to travel with the scorpion, and are now surprised that they've been stung.  

By Anonymous Anonymous, at Mon Sep 14, 09:32:00 AM:

So you support healthcare reform efforts as long as its the other guy getting soaked! Makes perfect sense.  

By Blogger dan, at Mon Sep 14, 09:37:00 AM:

Google "medical innovation in Europe" the first three articles that come up point up how the US outpaces Europe in all R & D aspects of medicine to the benefit of US citizens and the rest of the world. We provide Europe's military and medical defense.
If we in the US become more like the Euros who will bail us out?  

By Blogger Georgfelis, at Mon Sep 14, 09:58:00 AM:

NPR commented on something like that in Morning Edition today with a quote “The Pirate Party wants to reform copyright law, abolish all patents…”

Talk about your short-sighted idiots. The elimination of patents would make Sweden an international pariah on matters of trade. Medicine, engineering, publication, etc, would flee the country in droves, resulting in a much poorer nation (but with free music, whoopee).

That is unless NPR meant to say something like “modify patent law with respect to digital recordings…”, in which case only the music industry would flee the country.

The first thing I thought of when I heard this was how easily the Democrats in this country could turn this kind of thinking into a short-term “fix” for the medical cost issue, with long-term disaster down the road. (Sarcasm Warning) Simply invalidate all patents for medical devices and drugs in this country, and allow the unlimited importation of devices based on those now-invalidated patents. Within months, the US market would be awash with inexpensive medications and such life-saving devices such as pacemakers and stents, all produced in the same high-quality Chinese factories that have been providing the US with such quality toys such as the Lick Me Lead Train Set, and Milk Powder (Now with Extra Plastic Flavor!). The cost of medical care would go down, those old people who take so much of the health care dollar would have “unfortunate consequences”, China would be happy and continue to buy our debt, and the Congress could continue to collect their bribes…err…contributions. The only losers would be the US taxpayers. Again.  

By Anonymous luagha, at Mon Sep 14, 10:35:00 AM:

Of course, this will just make all such health care companies and manufacturers just move out of the US.  

By Anonymous Anonymous, at Mon Sep 14, 10:59:00 AM:

>>> Any way you look at it, the proposed tax is a calculated effort to divert capital from the medical technology industry to other uses in the economy

Actually, its an effort to kill more Americans so the federal government can skip out on its Social Security obligations.

Once you reach the age where you no longer produce tax revenue for the government, they need you to die.  

By Anonymous Anonymous, at Mon Sep 14, 11:06:00 AM:

Please, please, please. Let's start by calling it what it is:evil, evil, evil.

The culture of death doesn't do nice things to people they consider to be just inconvenient commodities. As John Paul told us: call black, black; white, white; and evil, evil!  

By Anonymous meta-4, at Mon Sep 14, 11:22:00 AM:

To the Stalinists, health, as is wealth, is a zero sum game. To them no new thing of value is ever 'created' and therefore, their only soluition is that all (these things) are subject to their progressive taxation tyranny.

But really, who among us surprised at this......? Didn't we know Obama before the elction? Shame on us.  

By Blogger JCCggrps, at Mon Sep 14, 11:29:00 AM:

It's not just medical devices - according to the copy of the proposal I found here each sector of the health care market will have an annual 'fee' in the $Billions that gets assigned out by market share.

There's also a 35% 'excise tax' for insurance plans above a certain premium, which sounds like a typical soak-the-rich scheme until you look at the numbers and realize the tax hits plans that cost about 30% over the national average. That's going to kill employers in expensive areas or whose employees have above-average medical needs. Oh, and these penalties are indexed to inflation (not health care costs), which is kind of important when premiums have more than doubled over the past decade.

Beyond that there's a kaleidoscope of 'solutions' to cost issues that basically amount to crude price controls with painfully obvious moral hazards and predictable consequences. This is probably the first time I've ever been literally sick over legislation, this is going to be a disaster.  

By Anonymous Anonymous, at Mon Sep 14, 11:32:00 AM:

Then when the increase in taxes (decrease in revenue), kills the company, and innovation...it will be a crisis, demanding the Govt. take over the whole thing!  

By Anonymous Anonymous, at Mon Sep 14, 11:45:00 AM:

The Healthcare bill would raise taxes first, and then expand benefits two or three years later. This is not a small point when you're touting that it won't raise the deficit over the course of a decade, and quite misleading.

Obama & Co are in the habit of submitting legislation to the CBO for cost analysis, and then changing the bill significantly later on the eve of a vote. Expect it to happen with Healthcare.  

By Blogger Kent, at Mon Sep 14, 02:09:00 PM:

Value Added Tax (VAT) is the stupidest thing in the world in its own right. You can sell three things - raw materials, upgrades to materials, or services. Upgrades to materials is the only element where you generate new value and efficiencies in how natural resources and human resources (our time) is spent. Whatever you tax you get less of, so VAT essentially screws anyone attempting to make things better or more efficient in any endeavor. Europe has used them for years and even without huge defense expenditures has lagged the US in all fields except civil engineering (your VAT dollars at work).

To introduce ANY VAT tax to the US is economic suicide.

I'm beginning to think the first rule of Obama is "If anything American is 'the envy of the world' (medical technology, human spaceflight, econonomic opportunity, etc.), either destroy it outright or lay the groundwork for its destruction over time."  

By Anonymous Anonymous, at Mon Sep 14, 03:16:00 PM:

I for one welcome our new low-tech med overlords. I'm heavily invested in leech farms.  

By Blogger Lance, at Mon Sep 14, 03:20:00 PM:

Why should Dodd, Rangel, Pelosi and Obama's wife be the only ones making convenient cash from earmarks and influence?

Dodd is chairman of the Senate Finance Committee, where the device VAT is being considered.  

By Anonymous Tim Kyger, at Mon Sep 14, 05:10:00 PM:

I just read this, and have *called* the DC office of my two Senators (I'm in Albuquerque NM FWIW).

Called?

Yes. Called.

I worked in the Senate for two years as a professional staffer on the Commerce Committee (space expert, FWIW) and six years in the House. I've been a lobbyist too. Here's how things are paid attention to by staffers, in ascending order.

Last, and very very very very much least, is email. It's too easy; no one who emails cares too damn much, is the attitude about it.

Next up are faxes. Lazy folks; can't they take the time to write a leter, or what?!

Moving up the priority list are letters. Hey, they actually took the time to write and mail something...even better is if it isn't a form letter; someone took the time to actually WRITE something.

Next up, is phoning the office. You can get the phone numbers off the Intertubes. You ask to speak to the appropriate "L.A." (Legislative Assistant; you use the phrase "LA," you are obviously one of Those Who Know How Things Work) and they'll put you through to their...voicemail, probably. But hey, it's more important that you've taken the time to call. You looked up the phone number, spent the time to call, *and* you knew to ask for the "LA."

If you actually do talk directly to the LA in question, even better!

Folks, if you DO talk to an LA, or get their name, you should share the information around.  

By Blogger randian, at Tue Sep 15, 04:35:00 AM:

There's also a 35% 'excise tax' for insurance plans above a certain premium

With the blurbs I've seen about essentially outlawing high-deductible insurance plans (which would also destroy everybody's eligibility for a Health Savings Account, but I digress) and mandating small out-of-pocket maximums along with no limits on lifetime costs, such a tax would likely be on every insurance plan were such rules to be made law.  

By Blogger Ike, at Wed Sep 16, 11:08:00 AM:

Now, this tax on toothbrushes and eyeglasses will only apply to those households making an obscenely extravagant annual income of $250,000 - right?  

By Anonymous Anonymous, at Mon Feb 07, 12:08:00 AM:

I love how a 2% tax on a product, goes to 20% by this industry. We all know the industry will just pass on the 2% cost to the public. They will not see any profits suffer. We all see how much the reinvest to medicines that actually cure, after all there's no money in curing only in keeping the poor suffering fool on the meds until they die. That's the way we keep profits high and costs low.  

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