Tuesday’s Republican victories in Washington inspired strong optimism among medical device companies in Minnesota and nationwide for a repeal of the 2.3 percent sales tax on their products.
Speaking to reporters Wednesday, incoming Senate Majority Leader Mitch McConnell, R-Ky., singled out the medical device tax as one of two deeply unpopular provisions of the Affordable Care Act that would be immediate targets for the new GOP-controlled Senate, along with the mandate for individuals to purchase health insurance.
The device tax is blamed for exporting jobs and driving up the cost of devices among the state’s burgeoning medical technology industry, which directly employs 28,500 Minnesotans in high-paying jobs at global firms like Medtronic, Boston Scientific and St. Jude Medical and more than 400 small and medium-sized companies.
The prominence of the medtech tax base has caused Minnesota’s Democratic senators, Amy Klobuchar and Al Franken, to break with President Obama in the past and support repealing the tax, even as they staunchly resist Republican efforts to repeal the Affordable Care Act. Even Obama is now signaling he may change his stance, noting in a news conference Wednesday that he would listen to Republican arguments to repeal the tax.
Last year Klobuchar and Utah Republican Sen. Orrin Hatch offered a budget amendment to repeal the tax, but Democratic leadership didn’t allow it to move forward in the Senate. Now both senators will enter a legislative chamber run by Republicans who have been openly hostile to the health care law as a whole and the device tax in particular.
“I have opposed this tax from the very beginning and will continue pushing my bipartisan legislation with Sen. Hatch to repeal it in the new Congress,” Klobuchar said Wednesday in an e-mail to the Star Tribune. “Sen. Hatch is expected to lead the Senate Finance Committee. With him serving in such a pivotal role, I’m hopeful it will get done.”
Republican Rep. Erik Paulsen, just re-elected in Minnesota’s Third Congressional District, believes Tuesday’s Republican gains were so overwhelming that they could push the tax’s repeal to a vote in the November-December lame-duck session of Congress.
“Repealing the medical device tax will be one of the earliest actions taken by the new Congress because of broad bipartisan support,” wrote Paulsen, who is principal sponsor of a House bill to repeal the device tax.
Investors sent med-tech stocks higher Wednesday in reaction to the election outcome. Medtronic and St. Jude shares, for instance, both rose more than 1 percent, far ahead of the broader market’s 0.3 percent gain.
Repealing a tax expected to generate as much as $30 billion in the next decade is no easy goal, even with Republican majorities in the House and Senate. Any stand-alone device-tax bill may face a veto threat by Obama, which caused some observers to speculate that repeal would more likely to be a part of a broader bill reforming business taxes or the Affordable Care Act.
“There are plenty of provisions of the ACA that both Democrats and Republicans don’t like, and clearly the American public doesn’t like, judging by last night’s results,” said Shaye Mandle, chief executive of Minnesota’s devicemaker interest group, LifeScience Alley, in St. Louis Park. “I certainly hope Congress and the White House choose to work together and look at the reform law and in particular the device tax.”
Steve Ubl, president of Washington-based trade group AdvaMed, said his impression is that the White House “is not necessarily wedded to the policy,” and might support repealing the tax either in a stand-alone bill or a broader reform package.
The four-year-old Affordable Care Act has never been overwhelmingly popular with Americans, but the provision imposing a special tax on devices to fund the overall operation of the law has been the target of criticism from Republicans and Democrats alike.
Supporters say the billions of dollars generated by the tax on devices are needed to pay for the effort to overhaul the U.S. health care system. Critics say it imposes higher costs on consumers and device companies alike, and hampers American companies’ ability to innovate.
The Internal Revenue Service began collecting the tax in 2013, and it did not send the industry into a financial nose-dive. A new report released this week by the nonpartisan Congressional Research Service said the tax’s impact on device makers’ output and employment would be “no more than two-tenths of one percent.”
“The analysis suggests that most of the tax will fall on consumer prices, and not on profits of medical device companies,” the report stated. “The effect on the price of health care, however, will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.”
The nation’s medical technology companies recorded $16.5 billion in income on $336 billion in revenue in 2013, according to a report published last month by Ernst & Young. The income figure grew by 16 percent compared to 2012, even though revenue grew only 4 percent in that time. But study authors noted that after adjusting for one-time charges incurred by Boston Scientific, the industry’s net income actually fell by 2.6 percent in 2013.
Money spent by medtech companies on research and development grew by 7 percent between 2012 and 2013, the report says.