The Shocking Truth About This Hated Obamacare Tax

Obamacare has brought on intense debate from impassioned advocates both for and against the historical health care legislation. Yet one rare place where bipartisan support has emerged is in condemnation of a controversial tax on medical-device manufacturers that has threatened a highly innovative industry and put thousands of high-paying jobs at risk.

Last month, the U.S. Senate voted on a nonbinding resolution to call for the repeal of the 2.3% tax on sales of medical devices. Although the vote was 79-20 in favor of the resolution, with 33 Democrats supporting it alongside 46 Republicans, the procedural vagaries of the Senate mean that the tax will remain in effect, and with the opposition of key Senate leaders, even the supermajority favoring the tax's repeal may be powerless to take further action. That's bad news for the companies that have been saddled with paying the tax.

U.S. Senate. Source: Wikimedia Commons.

Understanding the medical-device tax
At first glance, the 2.3% tax on medical devices seems like a drop in the bucket that many highly profitable device-makers should be able to shoulder easily. Yet what many people don't understand is that the tax is on each company's gross sales of medical devices, rather than the profits that those sales generate.

The impact of the tax, therefore, is much larger. Look at medical-device giant Medtronic (NYSE: MDT  ) , for instance. It doesn't get all of its sales from medical devices, but they make up a substantial portion of its overall business. With a reported profit margin of about 21% and assuming that its profits are evenly distributed across its product lines, imposing a tax of 2.3% would be equivalent to a roughly 11% surtax on Medtronic's income.

The lower a company's profit margin, the greater the impact of the medical-device tax as a proportion of net income. For the highly profitable robotic surgical giant Intuitive Surgical (NASDAQ: ISRG  ) , a medical-device tax of 2.3% equates to less than an 8% additional levy on net income from its da Vinci surgical systems using the same assumptions as above, thanks to the company's 30% profit margin. But for Stryker (NYSE: SYK  ) , which has a profit margin of about 15%, the medical-device tax is equivalent to a greater than 15% surtax on income from medical devices.

The companies that are hit hardest by the tax are those that are already unprofitable even before paying the new levy. For up-and-coming robotics-maker MAKO Surgical (UNKNOWN: MAKO.DL  ) , which has already lost $32.5 million on revenue of slightly more than $100 million over the past 12 months, imposing what could be up to $2.3 million in additional medical-device taxes not only adds insult to injury but threatens MAKO's ability to keep growing.

How the industry is responding
Even before the tax took effect, companies took steps to reduce its potential impact. Stryker said last November that it would lay off 5% of its workforce in order to save $100 million in costs. Medtronic shifted most of its hiring toward overseas operations, while Boston Scientific (NYSE: BSX  ) announced layoffs last July only to announce immediately thereafter its plans to invest $150 million in China.

Yet now that the tax is here, the fear is how much larger the impact could become. What's best known is the cost to existing major players in the medical-device space, but the collateral impact on small companies that are just getting started in the field could devastate the future of the industry. For many small companies, the prospect of having to deal with a substantial tax during their critical development phase will prove to be an insurmountable impediment -- or may simply lead entrepreneurs not to try in the first place.

Will the majority win?
What's clear from the Senate vote is that lawmakers on both sides of the aisle are unhappy with the medical-device tax. Yet despite their lack of support, without further action, the tax will continue and could do irreparable harm to a key industry for the nation's overall economic growth prospects.

Meanwhile, device makers like Intuitive Surgical face an uncertain future. Will Intuitive capitalize on favorable demographic trends or be crushed by unforeseen pitfalls? Fool analyst Karl Thiel's report highlights all of the key opportunities and risks facing the company -- and includes a full year of ongoing updates as key new hits -- so be sure to claim your copy by clicking here now.

Read/Post Comments (8) | Recommend This Article (5)

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 April 10, 2013, at 10:04 AM, PeteH66 wrote:

    My small business in a completely unrelated field is required to collect sales tax from my customers, which I then forward quarterly to the state. You are suggesting that medical device manufacturers will be required to pay this tax themselves rather than pass the cost on to customers.

    Can you document that device manufacturers do not collect this tax from their customers?

  • Report this Comment On April 10, 2013, at 10:29 AM, mdk0611 wrote:

    Pete - Unless the Senate and all the outside analysts are wrong the tax is directly assessed on the manufacturer and is not an "add on" equivalent to a sales tax.

  • Report this Comment On April 10, 2013, at 11:00 AM, BEN0007 wrote:

    Motley Fool has published this story about Obama care Tax at least a dozen time. getting really boring reading the same repetitive stories over and over again.

  • Report this Comment On April 10, 2013, at 2:29 PM, ISRGer wrote:

    I am sure that obama will do all he can to increase the hardship of those needing medical care includingd his dumber tax on medical equipment. Our Congress should nil this prsoposal and obama while we are at it. What a lack of common sense and brains. Go democrats. Charlieboy Stevens

  • Report this Comment On April 10, 2013, at 9:42 PM, chris293 wrote:

    Any tax on the medical device sales is counter-

    productive to what the President says to the public.

    If this is true, this will kill the companies whose own R&D produce new inventive products or systems that are expensive to market in the first place. His new plan is to socialize R&D into another expense for the taxpayers to pick up. The Democrates, I should say some Democrates think is, to me is like the old 5 year plans the soviets used prior to their fall. Now in Portland OR, we have leaders promoting with taxpayers funds, art projects that one, suck, and lead to killing incenive

    and pride in the art. Again its political.

  • Report this Comment On April 11, 2013, at 12:26 PM, ed697 wrote:

    I think the question of who will bear the burden of the tax is an interesting one. The law's specification of who pays the tax does not have anything to with who actually bears the burden. In a very competitive environment with prices to consumers that can fluctuate, the tax might be passed along to consumers through higher prices since we can assume the competitive suppliers are already at rock bottom profit margins. Of course, in real life, this is industry is not necessarily that competitive. And with medicare and its payment amounts for procedures driving much of what flows back to suppliers, the prices might not be able to fluctuate enough or fast enough.

  • Report this Comment On May 02, 2013, at 7:18 PM, rmiers1 wrote:

    Leave it to someone who spent time in their formative years To overlook poverty and less than stellar healthcare. to make people pay a premium to restore good health is beyond judeo christian values.

    In any country that does not even provide decent, clean water shows the true character of it's leaders AND it's national character

  • Report this Comment On September 27, 2013, at 3:26 PM, 17gina wrote:

    I have a question that you readers might be able to address. I read the portion of the law addressing the tax on Medical Device manufacturers. Is it true that application of the tax depends on the gross annual receipts of a company? Under 5million no tax is due. 5million to 25 million 50% of gross receipts on taxed, Over 25 million 100% of Gross receipts are taxed at the stated rate. I haven't heard this mentioned anywhere but the actual bill.

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