This $29 Billion Obamacare Roadblock Is What's Keeping the Government Shut Down

According to the World Bank, which records global GDP data annually, the United States led the world in 2012 with a GDP totaling just shy of $15.7 trillion. Growth in U.S. GDP hinges on a couple of factors, including an increase in exports, strength in U.S. small businesses domestically, and, most importantly, strong consumer spending, since it accounts for around 70% of GDP.

But, despite being the largest country in the world, our Congressional representatives have pushed us into a government shutdown over a disagreement of what amounts to fractions of a penny. In spite of Congress' begrudging passing of a federal budget that contained roughly $3.8 trillion in spending last year, we're currently mired in a government shutdown over what appears to be $29 billion in revenue collection over the course of the next 10 years!

We at The Motley Fool would just rather keep our nose out of politics altogether if we could, as it rarely has a meaningful impact on our investments. However, sometimes delving into the possible outcomes of political gridlock is unavoidable, as is the case here. So rather than pointing the finger at either political party, let's have a closer look at what I think is the primary reason for this governmental gridlock, what the potential outcomes could be, and what you need to know as an investor.

What's the cause for the gridlock?
My contention is that the greatest sticking point between the Republicans and Democrats has to do with the provision in the Patient Protection and Affordable Care Act, which you'll likely know better by its shorthand, Obamacare, which requires medical-device companies to pay 2.3% of their top-line revenue as a tax to the U.S. government. This tax, known as the medical-device excise tax, has been projected by the Congressional Budget Office to bring in $29 billion in total revenue between 2013 and 2022. It taxes everything from sophisticated robotic surgery machinery such as that made by Intuitive Surgical all the way down to everyday hospital supplies like IVs.

Why is the medical-device excise tax even in the PPACA?
Obamacare is a complex law, but its primary purpose is to expand medical coverage to as many non-insured individuals as possible. Clearly, even with subsidies in place, many non-insured families still couldn't afford health insurance on their own. Therefore, to expand health-care options to these lower-income individuals and families, the PPACA added taxes on certain individuals and businesses to help pay for these subsidies and the upcoming Medicaid expansion, as outlined under the law.

One way of doing that is through a surtax on investment income of 3.8% for individuals making more than $200,000 annually, or couples earning more than $250,000 per year. Similarly, the PPACA also instituted a 0.9% Medicare tax boost on individuals and couples earning $200,000 or $250,000 annually. Keep in mind that these taxes kick in once you cross these thresholds and not up to it, but they are expected to bring in $318 billion, according to estimates by the CBO, over the next decade.

Another revenue-generating method of Obamacare is the medical-device excise tax, or MDET. By having medical-device companies pay a 2.3% tax off their top lines, $29 billion would be raised over a 10-year period, which can be used to offset subsidies and expand Medicaid.

Why do Democrats support the medical-device excise tax?
Contrary to belief, this law wasn't introduced to tax medical-device makers to death, but to expand Medicaid so that individuals who previously had no access to reasonably priced health care now have that choice. The only way to reasonably do that is to levy additional taxes, including the 2.3% tax on device makers, requiring them to pay their fair share into the system so that 10 million or more new enrollees can be covered under Medicaid.

Why do Republicans oppose the medical-device excise tax?
Obviously there are partisan lines in the sand being drawn that would give cause for the Republicans to oppose practically every budget offer drawn up by Democrats, but the primary reason Republicans dislike the medical-device excise tax is that it could cost the U.S. jobs and innovative capabilities.

How can the medical-device excise tax cost the U.S. jobs?
Because the MDET removes 2.3% of gross (not even net!) enterprise revenue, medical-device makers of all forms are feeling the pain in their bottom line -- especially those that are currently unprofitable. Specifically, many are choosing to look overseas for tax relief and cheaper labor. By moving operations overseas, it would remove any tax liability on those medical products and give device makers an opportunity to ramp up growth once again.

We've already seen this happening throughout the sector, with three industry bigwigs shuffling their operations because of Obamacare. Medical-device maker Stryker (NYSE: SYK  ) , which you may be familiar with since it recently purchased robotic orthopedic specialist MAKO Surgical, laid off 5% of its workforce in 2011 in an effort to save more than $100 million annually. The move, in other words, was made to counter the higher taxes it was going to pay under the MDET.

Source: Steve Winton, Flickr.

Stryker isn't alone, though. Both Medtronic (NYSE: MDT  ) , the largest spinal device maker in the world, and Boston Scientific (NYSE: BSX  ) which is a large cardiovascular device manufacturer, have announced a keen focus on overseas hiring. Last year, Medtronic announced that it would bring on 1,500 new employees, but the focus would be in areas outside the U.S., while Boston Scientific announced global layoffs totaling 1,200-1,400 people (with the expectation that the majority would come from the U.S.) despite announcing a $150 million investment in China where 1,000 new jobs would be created.

Put simply, if medical-device makers are circumventing the MDET in overseas markets, they aren't going to create jobs here. In addition, if they do choose to keep their operations in the United States and pay the MDET, they're losing valuable research and development, dollars which can harm innovation, job hiring, and their long-term bottom-line profit.

So, which party is right?
Here's the unsurprising kicker: They both are! Even though health-care costs before the implementation of Obamacare were rising at a slower pace than at any time in the previous five decades, there was no feasible way to ensure that low-income individuals would ever have access to affordable health care. So the Democrats are correct that something needed to be done to incorporate lower-income individuals and families into the fold. Obviously, there are going to be increased costs for expanding Medicaid, so why shouldn't medical-device makers share in the costs of that expansion right alongside most taxpayers?

Conversely, the Republican Party is also correct that the MDET is costing the sector jobs. All we have to do is look at the three aforementioned examples, and we can clearly see that medical-device makers are shifting their focus overseas to reduce their tax implications.

How will this affect my investments?
Here's another surprise: The outcome of whether or not the MDET will stick or be repealed is unlikely to have a material impact on your medical-device holdings for anything longer than a few days or weeks.

The reasoning is that medical-device makers have had years to prepare for the implementation of the 2.3% tax, so if it's upheld it's pretty much going to be business as usual. We've had a good taste for earnings thus far from medical-device makers, and in many cases they weren't nearly as bad as Wall Street had predicted.

On the flipside, even if the MDET is repealed, it isn't as if Medtronic, Boston Scientific and the like aren't going to look to emerging markets for growth opportunities. The trend for the past decade in the technology sector has been expansion into China, India, Brazil, and other rapidly growing emerging markets. There's no reason to believe that device makers, even with a repealed MDET, would suddenly give up their overseas growth opportunities given the success of other sectors.

Ultimately, "steady as she goes" could possibly be your best course of action through this government shutdown if you own medical-device stocks. I would strongly suggest not getting caught up in the emotional finger-pointing of the political parties and instead focus on what your holdings have done to reduce their exposure to the tax (if anything), boost their research-and-development pipelines, and seek out overseas growth opportunities. That's what will set you up for long-term success in the end.

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Read/Post Comments (20) | Recommend This Article (6)

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 October 13, 2013, at 4:28 PM, peckbill wrote:

    The GOP has told so many lies during the past two years concerning budget and economic problems that the American people have turn a deaf ear to the GOP. The GOP is now trying to shift the blame for all the past two years of government to the Democrats, but it won’t work. The GOP is citing past years, as far back as 2006, to shift the blame; it won’t work. America has not had a budget for the past three years; who is to blame? The GOP is to blame. The people in the GOP members of the House and Senate of Congress have their own agenda (their agenda is beginning to fall apart and fragment) and they are not willing to work with other members of Congress or the grass roots people to resolve the problems. The Patient Protection and Affordable Care Act was approved by the full Congress in 2010 and signed by the President; in 2012 the GOP asked the Supreme Court to review the law for Constitutionality; the Supreme Court headed by a GOP President appointee told Congress and the American people that the Law was constitutionally correct. Money is not the problem; there is plenty of it to go around, but authorization to spend the money must come from the Congress and the GOP, both House and Senate, are telling the Democrats and the people of America NO, not unless we get our way. The GOP’s agenda(s) is/are built on lies and big money. If Wall Street calls and tells the GOP to “do it”, it gets done. The GOP is holding the American people hostage to get their childish way in Congress. The American people will not be held hostage and in the near future, it may be 2014 or even 2016, the American people will get regain their freedom. We do not need the GOP or it’s so called “Tea Party Members”; America was built on the foundation of freedom by, for and of the people. We will replace each and every GOP member over the next few years and those of you idiots that think your money can keep buying favor in government will get a great shock. If need be the Congress shall consist of Democrats and Independents; the name of you GOP members who try to switch, like Lieberman, shall be remembered as the cowards and members of Congress that held the American people hostage over childish agendas. A few good Congressmen, like McCain, may be politically hurt in the process, but America must be first on OUR agenda. Misfits the likes of Cruz, Paul, Ryan and other notable members of the GOP must fall to the will of the people. Five Democrats who side with the GOP are Reps. Ron Kind (Wis.), Jim Cooper (Tenn.), John Barrow (Ga.), Jim Matheson (Utah) and Mike McIntyre (N.C.).

    Beginning now and continuing into 2014, 2015 and 2016 we must and will target every GOP member in all levels of government for replacement.

  • Report this Comment On October 13, 2013, at 4:34 PM, earnestbunbury11 wrote:

    Just tax people that make over $500000.00 per year. With a sliding scale. 500K pays the least, 5Billion pays the most.

    Like Will Roger's said, 'People don't mind paying taxes, just want everyone to pay their fair share'.

    Share. Not exact same amount. A 50% tax on gas won't effect me as much as Bill Gates. Guess that makes me a communist.

  • Report this Comment On October 13, 2013, at 6:06 PM, MountainA64 wrote:

    @ peakbill care you elaborate with examples or even using English 111 argumentative guides. As all the readers are getting is you really don't like the GOP for some reason you failed to mention. Personal feelings where easy to tell, you think they all lie. So if that is your base thesis than would you not also really dislike all party's. Even Obama lied and told everyone this was not a tax, something this article shows three company's leaving over. My argument against the ACA is that the focus should be on improving the medical device industry's in order to lower there prices. The cost of equipment is astonishing for even basic simple items up to 400 dollars for aspirin in a few cases. Doctors malpractice lawsuits account for a debatable large percentage of heath care costs. What does the ACA do to prevent the 200,000 deaths a year from hospital errors? Deductibles now account for up to 40% of yearly income. So the UN-insurable will still be bankrupted and the doctor errors will still happen. People will still smoke and drink and eat more than they should accounting for up to 75% of the healthcare costs. So why is this ACA tax so worth shutting down the government over when all it does is cost everyone more?

  • Report this Comment On October 13, 2013, at 6:14 PM, clloyd53 wrote:

    Like any investor in today's world. You will support anything that robs the people and places that loot into investors pockets. The pyramid of increasing profits by enlarging the debt is nearing collapse. We are looking at a forced adjustment in the near future. That will plummet the world into an economic panic. Increasing investor profits by driving the working man and woman into poverty will only bring down the entire system.

  • Report this Comment On October 13, 2013, at 6:40 PM, psychdude1 wrote:

    I am personally tired of the back and forth. Time to put up or shut up. Either growing debt, expanding government programs, and total disregard for sound fiscal policies will work or not. Since the sentiment at the moment by the majority (based on polls) is the Republicans are wrong, threatening the Republic, and mean-spirited Tea Party types who should be honored to pay more taxes, I say it is time to see who's right. Why cap debt at all? Run it up. I think the Repubs should fall back and let the Dems run with it and let the chips fall where they may.

  • Report this Comment On October 13, 2013, at 6:43 PM, fastcash4u wrote:

    look it is the tea party and the republican party that shut down the government.

    You people are racist and hate this man because he is a black man in your white house. He has a plan to get the country moving again but because of your hatred for him you would rather shut down the country's government and say it Obama's fault.

    It is not his fault it is the billionaires like the stupid coke brothers. why won't you and people like you just come out and say we hate you Obama because you are black, we will do anything to get you out of office. Even if it means hurting our own mothers and our own fathers social security Checks, we do not care because we must take our country back. Foolish people you still have your country , remember you left England because of being over taxed but now you have come here to oppress the poor and the needy. May you blood be upon your own heads. You and this nation are no christians rather you are a hater of christ.

  • Report this Comment On October 13, 2013, at 6:57 PM, True411 wrote:

    Once again, Fool, you've been exposed as a shill for liberal democrats. The Senate voted 79-20 on March 21, 2013 in a non-binding vote to repeal the medical device tax. More than 30 democrats joined the Republicans in opposing the tax.

    This tax IS NOT the sticking point, Fool, the tax is overwhelming opposed by both democrats (who voted it in in the first place) and Republicans. The sticking point is ObamaCare itself - ObamaCare is driving up the cost of medical care for most people, it will reduce the quality of medical care for all people, and it's a bureaucratic train-wreck.

  • Report this Comment On October 13, 2013, at 7:08 PM, Semesa2 wrote:

    Sadly, the medical devices tax is just this week's flavor of Republican excuses to to hobble the government in order to serve a political expediency. A 2.3% tax on medical devices will have no real effect on GE and other medical device manufacturers.

  • Report this Comment On October 13, 2013, at 8:49 PM, zaum88 wrote:

    Ever notice that whenever a change is proposed people say its meaningless because it's too small to make a difference? I guess they're too stupid to realize that when you do that for everything proposed it adds up to nothing and you end up with constant 'rule by crisis' like we've had for the last 12 years.

  • Report this Comment On October 13, 2013, at 9:39 PM, rw93003 wrote:

    Creative Writing ---->". In spite of Congress' begrudging passing of a federal budget that contained roughly $3.8 trillion in spending last year, we're currently mired in a government shutdown over what appears to be $29 billion in revenue collection over the course of the next 10 years!" No Sean, it's about the businesses (and jobs) going overseas where the taxes are lower and it's not about $3.8 trillion in spending, it's about $17 trillion in debt. If unemployment was at 3% and we had no national debt shipping jobs overseas and spending $4 trillion wouldn't be a problem.

  • Report this Comment On October 13, 2013, at 11:02 PM, gulfcoastrebel wrote:

    It's not 'what', but 'who' is keeping the government shut down. Speaker Boehner has decided to not let the House vote to end the shutdown, where with Democrats and some Republicans, the numbers are there to end it, so he can keep his position. You don't negotiate anything with people who take your country hostage. That would be a moral hazard: they would only do it again and again.

  • Report this Comment On October 13, 2013, at 11:55 PM, TheTeaPartyTango wrote:

    just sit right back and you'll hear a tale

    a tale of a fateful trip

    that started from a D.C. port

    aboard a tea party ship

    The mate was a mighty tanning man

    the skipper brave and sure

    all americans set sail that day

    for a 13-day tour

    the weather started getting rough

    the tiny ship was tossed

    if not for the courage of the fearless crew

    the republic would be lost

    the ship set ground on the shore of this uncharted political isle

    with Boehner, Ted Cruz too,

    the millionaires and their wives

    the tea partiers, sarah palin,

    Here on Boehner's Isle

    So this is the tale of the castaways

    they're here for a long long time

    they'll have to make the best of things

    it's an impossible uphill climb

    Boehner and Ted Cruz too,

    will do their very best

    to make all americans suffer

    in their hostage taking mess

    no brains, no clues, no pathway through

    not a single plan in sight

    like zippy and the pinheads

    as clueless as can be

    so join us here next week my friends

    you're sure to get a smile

    from the hostage-taking castaways

    Here on Boehner's Isle

  • Report this Comment On October 14, 2013, at 12:00 AM, zantor2 wrote:

    Let's get one thing straight about placing blame on Washington, D.C.

    They are ALL (doesn't matter what political party name they carry) LIARS and 100% disingenuous in everything they say to THE PEOPLE>

    THEY only truly care about two things.

    1. POWER = as much as they can personally get.

    2. getting RE-elected.

    They will say one thing today and something totally different the next =- it all depends on what their HANDLERS are telling them the LITTLE people are yammering about.

    A POX on all their houses.

    THEY have gotten OUR nation in big trouble and they don't have the cojones to do what is really right (COMPROMISE) to get the peoples work done.

  • Report this Comment On October 14, 2013, at 12:19 AM, foolthefools wrote:

    If I may say,

    There is one thing that Bush can claim credit for that Obama will never be able to touch....

    Building #7

    BAZINGA!

  • Report this Comment On October 14, 2013, at 12:37 AM, airjackie wrote:

    To late for this story the reason for the Shut down has nothing to do what Obamacare was said today and across the US by Republican/Tea Party. Fact Obamacare saves money and remember we wasted 3 trillion dollars alone in Iraq. We gave Banks a bailout of 780 billion dollars so the figure for Health Care is small. The reason for the shut down the Tea Party/Republicans said they want a white President and want Obama to step down. The deep lost of the way of life in 1861 is still painful and as the protested said this is a Revolution to take the country back. Romney losing the election was to much for the racist and they have many lawmakers supporting this fight.

  • Report this Comment On October 14, 2013, at 1:13 AM, sharding7211 wrote:

    Is everyone missing the point? Up to 30 million uninsured now having insurance means increased revenue for medical device makers well above the 2.3 percent tax in the short term. And its not like they dont pass the cost on anyways. Can we get over this faux argument?

    If these companys could have cut cost by transfering operations overseas there executives have a fiduciary responsibility to create value for their shareholders. Globalization has led to a race to the bottom for decades. The ACA provides easy cover for decade long trends that get publicized as strictly caused by ACA.

    You'all need to inform yourselves bc if you did you would realize the GOP is very dangerous. We all want balance budgets and decreased spending, but their motives and tactics are only about regaining power.

  • Report this Comment On October 14, 2013, at 2:12 AM, Jasaus wrote:

    Seems to me that if these companies stand to save 100-150 million by sending work overseas, they'd probably do it anyway like every other manufacturing company. This tax is just the perfect excuse.

  • Report this Comment On October 14, 2013, at 5:04 AM, TerrifiedCitizen wrote:

    SO TRUE... SO, SO SAD!

    I have not read of a single dollar reduction in foreign aid as a result of sequestering. All items cut were for the express purpose of hurting the American taxpayer/working people the most!

    Well? DEMOCRATS and Republicans ('different' ONLY in name)

    AARP was no help, either. And I wonder just how many I will get back?

    Someone please tell me what's wrong with all the people that run this country!!!!!!

    "We're broke" and can't help our own:

    Veterans,

    Seniors,

    Orphans,

    Homeless,

    Etc.,?????

    But, over the last several years THEY have provided direct cash aid to.....

    Hamas - $351 M,

    Libya $1.45 B ,

    Egypt - $397 M,

    Mexico - $622 M,

    Russia - $380 M,

    Haiti - $1.4 B,

    Jordan - $463 M,

    Kenya - $816 M,

    Sudan - $870 M,

    Nigeria - $456 M,

    Uganda - $451 M,

    Congo - $359 M,

    Ethiopia - $981 M,

    Pakistan - $2 B ,

    South Africa - $566 M,

    Senegal - $698 M,

    Mozambique - $404 M,

    Zambia - $331 M,

    Kazakhstan - $304 M,

    Iraq - $1.08 B ,

    Tanzania - $554 M,

    A total of 14,933,000,000

    (That is 14.933 Billion) and counting, and recipients of all this foreign aid still hate us!!!!

    But on the other hand, our retired seniors, living on a 'fixed income after supporting this country with taxes their entire working life would have to become a hostile foreign power to get the help they need!

    The get no respect while our government and religious organizations will pour Hundreds of Billions Of $$$$$$'s and Tons of Food to Foreign Countries!

    And another atrocity....

    We have Hundreds of adoptable

    American Children who are shoved aside to make room for the adoption of foreign orphans.

    AMERICA : A country where we have Countless Homeless without shelter, Children going to bed hungry, Elderly going without needed medication and the Mentally ill without treatment -- etc.

    YET ..........

    They will have a 'Benefit' Show for the people of Haiti , on 12 TV Stations ; ships and planes lining up with food, water, tents clothes, bedding, doctors and medical supplies.

    Now Just Imagine if our own * GOVERNMENT * gave 'US' the same support they give to foreign countries.

    Sad, isn't it?

  • Report this Comment On October 14, 2013, at 5:33 AM, Folornhope wrote:

    I find it humorous that people point the finger at the GOP for the shut down.

    Do you seriously think that we can keep raising the debt ceiling? We had NO budget the first four years of Obama's administration. The Senate did not pass one, and that was with a Democratic majority in both houses. Immigration reform was not an issue because the votes of the Hispanic population were not needed at that time.

    As far as the shutdown goes, the House has sent five budgets to the Senate and the Senate has rejected all of them. They refuse to negotiate with the Republicans to effect a compromise. Obama has said that if he doesn't get what he wants he will not sign the budget.

    So can you explain to me how if the House has sent up five budget proposals and the Senate, and the Senate and President refuse to negotiate a compromise how is that the fault of the House?

    To me it is the Democrats who are causing the shut down and if the press weren't busy being on their knees in front of the Obama they would be reporting BOTH sides instead of their usual skewed one sided world view.

    As a side note, for those who keep saying that people don't like Obama because he's black....he's also half white. Did you ever think that its not because he says he's black, that it could be because of his policys?

  • Report this Comment On October 14, 2013, at 6:52 AM, IainElliott wrote:

    Where are the protests? Veterans are protesting the lack of access to war monuments and I have heard that truckers were planning a traffic slowdown in DC. Are the news media so hamstrung by the ruling elite in America that they are ignoring demonstrations of the will of the American people, for fear of encouraging them? Or are Americans in general too complacent and passive to lift a finger or raise their voice against the imminent destruction of their country's credit and prosperity? I ask this question not as a Republican or Democrat, but simply as a concerned citizen. General Washington would have a hard time mustering troops nowadays.

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