“This tax has already eliminated thousands of jobs in the medical device industry, and it’s on track to eliminate thousands more if it isn’t repealed.”
–Sen. John Thune (R-S.D.), CNN.com opinion article, Jan. 6, 2015
The push to repeal the medical device tax already has bipartisan support, and it is expected to be one of the first issues taken up by Congress this year. The repeal of the 2.3 percent excise tax, imposed under the Affordable Care Act, is one of the priorities of the Republican-led Congress as lawmakers aim to chip away at parts of the health-care law.
We don’t intend to single out Thune. He is among a chorus of lawmakers — Democrat and Republican — who want to repeal the tax, and among many who are using the job-loss claim as one of the reasons to get rid of it. Sens. Al Franken (D-Minn.) and Amy Klobuchar (D-Minn.) have spoken against the tax since 2009, saying jobs would be threatened. Sen. Orrin G. Hatch (R-Utah) is a long-time critic of the tax and will push for a permanent repeal through the tax-writing Senate Finance Committee.
Rep. Charlie Dent (R-Pa.), in an interview about GOP legislative priorities, said “33,000 jobs have been affected or lost as a result” of the tax. Rep. Erik Paulsen (R-Minn.) also penned an editorial in the Wall Street Journal that the tax “has already cost as many as 33,000 American jobs.”
Have thousands of jobs in the American medical device industry been eliminated as a result of the tax?
The claim of massive job losses is one of the main arguments for the repeal. The tax is imposed on a variety of medical devices, including MRI machines and pacemakers, but does not include consumer retail items such as contact lenses or eyeglasses. The tax, which took effect January 2013, is projected to generate $29 billion over 10 years in net revenues. The effective tax rate is about 1.5 percent, because businesses can deduct it from their federal taxes.
Critics also say the tax is forcing jobs overseas and is stunting innovation in the medical device industry. The Fact Checker examined the latter two claims in a previous article which resulted in a ruling of Two Pinocchios.
Lawmakers frequently cite a survey by the trade group Advanced Medical Technology Association, or AdvaMed, to show the negative impact of the tax. Thune was citing broad industry studies, including the AdvaMed report, rather than cherry-picking specific companies, Thune’s spokeswoman AshLee Strong said. From November to December 2013, 38 large and small companies responded to the electronic survey that they have cut jobs and forgone hiring as a result of the tax. The total impact on industry employment, the survey found, was 33,000 jobs — 14,000 actual job losses and “forgone hiring” of 19,000 workers.
AdvaMed says the survey was sent to every member of the organization, and its 2013 annual report says it has nearly 300 members. So that’s a pretty poor response rate. For all we know, the other 250+ companies added jobs and saw no reason to respond to the survey. The survey certainly does not tell you much about the impact of the medical device tax on the entire industry, let alone AdvaMed’s membership.
“It’s a perfectly credible research methodology,” said David Nexon, AdvaMed’s head of domestic policy, though he said there “conceivably” could have been some bias since not everyone responded. “I wouldn’t say the number we came up with is necessarily 100 percent on the nose, but it’s pretty clear that there are substantial job losses connected with the tax,” he said — whether it’s 33,000, 40,000 or 28,000.
Strong also noted a 2012 report by the right-leaning American Action Forum, saying it portrays the “damage caused to the vast majority of U.S. medical device companies that are not publicly traded.” But that report is rather dated — it simply offered a prediction that 14,500 jobs “will be lost.” It did not tally the actual impact of the tax.
Some companies certainly have announced layoffs since 2012, ranging from dozens of employees to 1,000-plus jobs. Not all announcements attributed the cuts to the tax (or anticipation of the tax), but some did. Many of the announcements were made from early-2012 to mid-2013. Here is a sample:
- Abbott Laboratories laid off 450 employees from its Temecula plant, and continued the layoffs through late 2014 as a part of a restructuring and realignment plan announced in 2012. Employees could apply for other vacant positions in the company.
- Medtronic announced it would eliminate 1,000 jobs, mostly in the heart rhythm device unit. But company officials also said they plan to hire 1,500 workers over an 11-month period. After all the changes, overall employment in the United States was expected to be “flat to slightly up.”
- Boston Scientific officials said the medical device tax “played a role” in the company’s decision to cut up to 1,000 jobs, or 10 percent of its workforce.
Lawmakers also cite anecdotes of local manufacturers blaming the tax for creating harm to their companies. Shawn Millan, communications director for Dent, e-mailed to The Fact Checker: “Everything that Congressman Dent has heard from his local manufacturers indicates the tax is damaging to their ability to maintain or potentially expand their workforces, their facilities and their research and product development efforts. The fact that the tax is harmful to manufacturers across the country is why its repeal enjoys broad bipartisan and geographical support.”
Drew Griffin, Paulsen’s press secretary, wrote to The Fact Checker: “Congressman Paulsen has traveled the country talking to these businesses, and he continues to hear from them that they are stopping projects, laying off workers, or having to borrow money because of the tax.”
Despite cuts to some companies, there was growth in others in 2013, including smaller companies, according to a report by EP Vantage, the editorial arm of health-care research and analysis group EvaluateMedTech. Five of the companies in the report’s top 10 head-count increases by percentage of staff worldwide were companies headquartered in the United States and have fewer than 600 employees.
Not all small companies or start-ups are yet feeling the pressure to cut jobs. A spokesperson for Innovative Trauma Care, a San Antonio start-up that makes emergency clamps that control bleeding before the surgery, said the company is so new that the impact of the tax has been minimal. Frank Fischer, chief executive of NeuroPace, a privately held California company of 120 employees, said the tax hasn’t had any impact on his employee base because the company is just beginning to commercialize devices to treat neurological disorders. But Fischer said he anticipates forgone hires as the company grows.
A January 2014 survey of 1,203 senior managers at U.S. medical device companies by Emergo Group, a medical device industry consulting firm, found 8.7 percent of respondents confirmed they reduced staff or employee headcounts in 2013 to lower costs. That was on a par with the 8.4 percent of respondents who had said the previous year that they planned to reduce headcount.
Emergo also found the impact of the tax was not as severe as predicted. Fifty percent of respondents in 2014 said they did not make any significant changes in response to the tax.
Again, let’s note that this was based on the results of responses from more than 1,200 senior managers. That certainly appears more credible than a survey of just 38 companies.
[Update: Emergo will publish final results of the most recent survey late January 2015, but some preliminary numbers have been made available. Of nearly 900 senior managers of U.S. medical-device tax companies who responded, 42.6 percent said they did not make any significant changes in 2014 in response to the medical device tax. About 10 percent said they reduced staff or employee head count to lower costs in 2014.]
The Congressional Research Service also found the medical-device tax would have “fairly minor effects” on industry jobs, and that output and employment in the industry would fall by “no more than two-tenths of 1 percent.” (AdvaMed criticized the CRS analysis as “fundamentally flawed.”)
Medtronic said in a statement: “The device tax is one of the many business pressures we must account for in our planning. The reality is that the medical device tax takes funding away from other areas where we could invest. Medtronic has always stated that we believe that the medical device tax is a regressive tax, and we believe it discourages innovation.”
While many companies cited the tax as a contributor to layoffs, there is no evidence it was the sole factor. The medical device industry has faced many regulatory and technology changes in recent years that have made the industry’s future volatile.
The industry, for the most part, remains stable despite various challenges. This is especially true for the largest publicly traded companies in the United States, according to the National Center for Health Research. The center’s analysis found profit margins reported by the companies remained stable over the past 10 years. (Clarification: This was different from stock prices, which increased dramatically during that time, the center found.)
Nexon, the AdvaMed executive, acknowledged there are many factors that contribute to companies’ staffing decisions. But he said the companies’ answers to AdvaMed’s survey were telling that staffing cuts were attributable in some part to the tax, because it is an additional payment they have to take into account. Head count is an “obvious place” that companies are going to look to cut, Nexon said.
“I don’t want to attribute everything to the tax because there’s a lot going on in the industry besides the tax,” Nexon said. “There are a lot of things that are going on that are harder to address but this one should be easy. It just takes an act of Congress to get rid of it.”
The Pinocchio Test
The public is not privy to the companies’ individual business decisions, so it is difficult to prove or disprove the exact impact of the tax on their personnel matters. Based on self-reported announcements and survey answers by small and large companies, there were indeed some jobs that were cut at least partly due to the tax or the anticipation of its impact. The tax is not helping the industry, but neither is it single-handedly destroying thousands of jobs. Indeed, one survey of senior managers found that the impact was less than expected.
What we have here is a bipartisan failure, with lawmakers on both sides of the aisle rushing to declare the tax is killing jobs. The evidence for that is pretty skimpy, unless one just wants to pick and choose a few companies. At the very least, citing a single (and relatively small) tax as the sole reason for current and future job cuts in the volatile industry is a misrepresentation.
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