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This Sector Will Be Crushed If Obamacare Passes

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For years, medical-device makers had only one friend and one archnemesis. The ironic part was that they were one and the same: the Food and Drug Administration.

The FDA holds the key to medical-device approvals in the U.S., but significantly tougher safety and efficacy tests lengthen the average approval process domestically to four and a half years. The approval process in Europe and abroad takes considerably less time, causing a select few device makers to begin looking abroad for their future growth -- such as Delcath Systems (Nasdaq: DCTH  ) , which is thinking about outsourcing jobs to Europe. That trend, however, may be about to pick up steam, and it wouldn't be the FDA's fault this time.

Death by excise tax
A decision from the Supreme Court on the whether or not the Affordable Care Act (aka Obamacare) is constitutional is looming in just a matter of days. At stake for medical-device companies is the medical device excise tax (MDET), a 2.3% tax on total revenue, not profit, which goes into effect in 2013 and will pay a portion of the costs associated with the ACA.

If approved, medical-device companies will probably be looking to trim costs according to a survey published in March, whereby the Massachusetts Medical Device Industry Council polled top-level executives at medical device companies. A whopping 44% of those surveyed noted that they would be passing along the MDET costs to the end user, which, in turn, makes medical devices more expensive. Of the 39% that said they would internalize the costs, 50% said they would reduce research and development budgets, 25% responded that they'd lay off workers, and 25% said they'd outsource jobs overseas.

No vacancy
If you think this is fearmongering on my part, then you'd be sorely mistaken, because we've already seen this concern expressed by multiple medical-device CEOs.

Alexis Lukianov, CEO of San Diego-based NuVasive (Nasdaq: NUVA  ) , predicts that his company will bear the burden of a 60% tax rate and a drastic reduction in R&D spending and may cut up to 200 jobs in 2013 if the excise tax isn't overturned.

Michigan-based Stryker (NYSE: SYK  ) announced that it's laying off 5% of its workforce in November as a direct result of the impending excise-tax legislation. The move is expected to save the company $100 million annually.

Even Medtronic (NYSE: MDT  ) , the world's largest medical-device company, has been cautious about its hiring. It has stated its intention to hire 1,500 workers over the next 11 months; however, it made it clear that the majority would be in faster-growing overseas markets.

Perhaps the biggest slap to Obamacare came in late July, when Boston Scientific (NYSE: BSX  ) announced that it will lay off off 1,200 to 1,400 workers globally. That announcement came just one day before it declared a $150 million investment in China that would create 1,000 jobs in that country.

Foolish roundup
The prospect that medical-device companies may move their production overseas and may cut back on research and development expensing is very real. We won't have a definitive answer from the Supreme Court for a few more days, but I can tell you one thing: If Obamacare is upheld, the medical-device sector could see an unprecedented number of layoffs in 2013.

Agree? Disagree? A little bit both? Tell me about it in the comments section below.

With the U.S. elections around the corner, our team of analysts at Motley Fool Stock Advisor realizes there's more at stake for stocks than just what we're witnessing in the health-care sector. Find out which stocks could benefit based on which president-elect wins in our latest special report. Get your free copy!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Medtronic. Motley Fool newsletter services have recommended buying shares of Stryker. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never takes a sick day.

Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2012, at 11:10 PM, fppjr wrote:

    Why is this so surprising?

    Way back when Ross was running for President he made his famous comment about the SUCKING SOUND!

    Government won't change until those politicians and the people they appoint serve only ONE TERM!!!!!!

    Even then there is no guarantee!

  • Report this Comment On June 23, 2012, at 11:38 PM, spiriton wrote:

    Hardly the definition of 'Crushed'.

  • Report this Comment On June 24, 2012, at 12:19 AM, rje126 wrote:

    its interesting that our politicians think that by taxing business the citizens won't feel its impact. but when jobs are cut or outsourced, hiring curtailed, and other ancillary effects are felt, the electorate will stand up and take notice. its time to hold washington and our elected officials accountable for their actions. if BO spent any time running the country and less time campaigning and fundraising, we might be a whole lot better off. Or not.

  • Report this Comment On June 25, 2012, at 11:20 AM, rossj2 wrote:

    Layoffs in this industry sector started long before Obamacare came into the picture. Reimbursement from private and government payers has been declinig for years with an obvious impact on the medical device business model. The good news is that much of the historical infrastructure and costs were added because of decades of strong profit margins when funding for health care was flush. These are now superfluous and will be trimmed where they don't add to value. If Obamacare is struck down, the immediate benefit is the recision of the excise tax and this will to some extent blunt future cuts.Since R&D is still crucial to growth and future revenues my predition is that these investments will be preserved and perhaps enhanced but they will be much more carefully vetted before being approved

  • Report this Comment On June 25, 2012, at 7:23 PM, Cdinphx1 wrote:

    This tax will have huge ripple effect that has already begun. I work in a cardiac cath lab where we ace pace makers and stents. With reimbursement rates continually being cut, we already see job losses and rate cuts. Where I work we already have begun factoring in this tax, even though this tax is for supplies, it will drive up supply costs for the hospital and with reimbursement rates not increasing, uninsured and self pay patients not paying, the hospitals bear the brunt of the cuts not the device makers. The hospital in turn cuts jobs and wages or in our case both. Now we work shorter days for less


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