Republican Congressman Erik Paulsen of Minnesota sponsored a bill called the “Protect Medical Innovation Act–a timely piece of legislation designed to repeal the tax on medical devices imposed under the Affordable Care Act (a.k.a. “ACA,” “ObamaCare”). Believe it or not, Paulsen has successfully rallied the minimum number of votes (218 co-sponsors) required to pass the bill. If it happens, the CBO will be obliged to take another $20 billion off the revenue side of the ACA’s ever-changing balance sheet.
As you would expect, most of the major medical device manufacturers have been aggressively lobbying for passage of the bill with Medtronic playing a leadership role, as Medtronic also happens to be based in Minnesota and is a major contributor to Mr. Paulsen through its PAC. Of the 40 lobbyists employed, Medtronic has 14 in its stable and has doubled its investments in fighting this tax over the last few years (up to $4M annually).
But what’s even more interesting and lends credibility to the conspicuous name given this piece of pending legislation is the fact that venture capital (VCs) firms are throwing their money at these same lobbyists at record levels and for precisely the same reasons. And that is not par for the course.
Regardless of your reform politics, we all need to pay closer attention to this unusual affinity:
Historically, the venture capital community loves medical device start-ups. But they’re avoiding them in record numbers, as evidenced by their investments in early stage ventures being off by almost 33% in 2011. When all the leading players in the industry are laying-off their work force and stepping up their investments in off shoring, well, if you were a VC, would you be risking your capital on something new?
FYI: Analysts figure about 50,000 industry jobs are going to be lost as a result of this tax, so those who say “the industry is just posturing” are either in denial or have a skewed sense of reality.
The medical device tax in the ACA is “just 2.3%,” but more misinformation circulates about this tax than any other I can think of in recent memory. Let’s face it, these companies have never done anything to engender public sympathy, so “John Q” is not running to The Hill voicing any support.
This is a top line tax on sales, so when it is applied to corporate earnings it translates to a whopping 15%. Go ahead and throw in Federal and State taxes and you’ve created an effective tax rate on US medical device companies somewhere in the neighborhood of 55%. By the way, this medical device tax is payable regardless of company profitability, meaning the interests of the VCs and other qualified investors are now subordinate to the interests of the Fed. The tax was designed that way so the CBO wouldn’t have to hedge even further on the tax’s estimated revenue contribution numbers.
If you’ve got any time under your belt as a sourcing professional in healthcare, you can rattle off a number of things you’d like to see fixed concerning the business practices of these same companies. I mean, when was the last time you felt sorry for these guys? Leave it to our government to come up with a punishment so severe that most of us (if you believe what you read) actually can’t support it. I feel like Bruce Willis’ character in that disturbing “hillbilly scene” in Pulp Fiction. Uncle Sam has actually caused me to throw my support behind someone who’s been trying to kill me for most of my career.
—Tom Finn
