Medical Device Tax Could Cost Jobs

New study by the Advanced Medical Technology Association says 43,000 jobs will be put at risk.

The Advanced Medical Technology Association is concerned about U.S. jobs. If the medical device tax is imposed it "could force companies that would otherwise never leave the U.S. to make difficult choices based on stark economic reality," explained Diana Furchtgott-Roth, Hudson Institute senior fellow and co-author of a new study released on Sept. 7.

The 2.3% excise tax on medical devices is a provision of the new healthcare law, and will take effect in 2013. The group points out that the tax will roughly double the device industry's total tax bill and raise the average effective corporate income tax rate to one the highest effective tax rates faced by any industry in the world. The Joint Tax Committee estimates that the tax will raise $20 billion in revenues over the period 2013-2019.

"The effect of the tax on earnings of U.S. companies is likely to be significant," said the study." The industry directly employs about 400,000 Americans, and the study concludes that the device tax puts 43,000 of those jobs at risk, with a corresponding loss in wages of more than $3.5 billion."

In 2009, the medical device industry provided well-paying jobs to more than 409,000 employees, who earned more than $33 billion in labor compensation. Total labor compensation per employee is more than $81,000 annually.

As far as the geographical effect, California has the largest share of employment in the filed with 76,000 employees. Other states with more than 10,000 employees include Florida, Illinois, Indiana, Massachusetts, Minnesota, New Jersey, New York, Ohio, Pennsylvania, Texas and Wisconsin. Each of these states also has more than $2.3 billion in value added from medical devices.

Another concern the group has is the effect of the tax on companies that create novel technologies. Companies tend to suffer losses in their early years when focused on research and development for a new product. These start-up companies would have to pay the full tax regardless of whether they had any profit. "This is a tax on innovation," said Stephen J. Ubl, CEO of AdvaMed. His group has come out against the tax.

Moreover, the new tax will be paid both by firms that have net income and those that do not. Ninety-five percent of American device firms have sales of less than $100 million, and these firms manufacture exclusively or primarily for the domestic market. Even larger American firms with substantial international sales typically sell a much higher proportion of their products in the U.S. market than do their foreign-based competitors.

This puts American-domiciled firms at a significant disadvantage compared to foreign competitors, the group says. Smaller companies selling exclusively in the domestic market will be hardest hit in their ability to maintain profitability, attract capital or invest in innovative products compared to foreign rivals. Even large international firms will be placed at a disadvantage relative to their foreign competitors, the study explains.

Medical device manufacturing is a major source of exports for the United States. The study shows that the industry exported more than $32 billion in first eleven months of 2010. Roughly one third of medical devices manufactured in the United States are exported, an unusually high proportion for an American industry. Major markets include Japan, the Netherlands, Canada, Germany, and Mexico.

The United States also imports medical devices from around the world. During the first 11 months of 2010, the United States imported more than $30 billion worth of devices. Major sources of supply include Mexico, Ireland, China, Germany, and Japan. For most segments of manufacturing, American imports substantially exceed exports. Medical devices are a rare exception with the U.S consistently enjoying a favorable balance of trade, the association points out.

The medical device manufacturing sector is one of the healthier segments of U.S. manufacturing, the association explains, bringing in annual revenues of $116 billion. Medical devices are distributed through wholesale distribution networks which likely add an additional 34% or $39 billion to the value of medical devices, the study estimates, and the total wholesale value of medical devices was approximately $155 billion in 2009.

What concerns the group is that it believes in response to the new tax, prices of medical devices will rise, and consumers and health care providers will pay more for medical devices. The exact change in prices for medical devices as a result of the excise tax will depend on various economic parameters, but an estimated half or more of the excise tax will likely be passed along to end users in terms of higher prices.

To view the study click here.

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