The Truth Behind Obamacare's Job-Killing Tax

Calling the implementation of the Affordable Care Act (better known as "Obamacare") controversial would be a gross understatement, but the actual effects on the med-tech space are arguably less controversial at this point. Healthcare utilization has not picked up significantly and multiple companies have reported minimal recoveries in procedure/product volumes. What's more, while there has been a wave of M&A in the sector, it has been more about leveraging costs and establishing strong positions as hospitals become increasingly aggressive.

The tax is here, but where are the patients?
The 2.3% medical device tax has been with the industry for more than a year now, leading to a not-so-surprising decline in gross margins for major device manufacturers like Medtronic (NYSE: MDT  ) , St. Jude Medical (NYSE: STJ  ) , and Stryker (NYSE: SYK  ) . At the same time, volumes have not picked up appreciably across the industry.

One of the core arguments from ACA supporters was that med-tech manufacturers would gain in patient volumes (from newly covered consumers) more than they would lose from the tax. The problem with this argument is that the med-tech industry generates substantial sums from products like implanted defibrillators, orthopedic implants, and surgical supplies and these are used far more often in older patients that were already covered, while those who are now newly covered skew younger and more toward pharmaceuticals than major devices in terms of their health care needs.

AdvaMed, an industry trade group, goes further. AdvaMed claimed in a survey released in February of this year that the tax has led to a net loss of 33,000 jobs in the med-tech industry – 14,000 actual job losses and 19,000 jobs not created that supposedly otherwise would have been.

In any case, it's not all doom and gloom. Companies like Medtronic, Stryker, and Covidien (NYSE: COV  ) generate increasingly large percentages of their revenue from overseas (where the tax does not apply) and have implemented a variety of cost-saving efforts through leaner manufacturing, more efficient supply chain management and so on. To that end, Intuitive Surgical reported that the net effect of tax has been a 1% reduction in its gross profit for 2013.  There have also been not-so-subtle efforts to pass along the costs of the tax through higher prices.

Will utilization pick up?
Analysts have speculated that health care utilization (hospital admissions, physician office visits, etc.) fell in the first four months of 2014 largely because of weather and Obamacare-related changes in behavior. Some rushed to the doctor before the end of 2013 to take advantage of their old plans and some analysts have speculated that forced switches to higher-deductible/higher-co-pay plans has led to sticker shock and less health care consumption (as health care spending apparently declined in the first quarter of 2014).

Utilization trends are arguably more relevant to managed care companies, service providers, and pharmaceutical companies than the device companies. Typical visits do not lead to significant device consumption and more often involve a consultation with a physician and perhaps a prescription.

The M&A surge has come, but not as expected
When Obamacare was passed, there was general agreement on the sell-side that small and mid-cap device companies would suffer disproportionately from the tax, as their revenue base is more heavily weighted to the U.S., they have less leverage to wring savings from the supply chain, and fewer opportunities to recover the lost gross margin through operating efficiencies. With that, smaller companies would be forced into the arms of larger companies through M&A.

So far, that hasn't happened. True, there has been an increased level of M&A activity, but it has generally skewed more toward large deals like Medtronic-Covidien and Zimmer-Biomet. These deals seem to be anticipating a med-tech world where hospitals are looking to deal with fewer suppliers and where operating scale is even more valuable than before.

The bottom line
Thus far, it looks like the impact of Obamacare on the medical device industry has been modestly negative at most. Patient/procedure volumes have not increased appreciably, but nor have margins fallen off as badly as skeptics projected. Likewise, while there has indeed been an increase in the level of M&A activity, there hasn't really been that large scale move of smaller companies forced into deals by untenable margins. As is typically the case, then, both the bears and bulls have overstated their case in terms of the ACA's impact on the industry.

But the opportunity with this new technology is understated, if anything
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3027135, ~/Articles/ArticleHandler.aspx, 9/1/2015 10:41:56 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

Today's Market

updated 1 hour ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
COV $0.00 Down +0.00 +0.00%
Covidien CAPS Rating: *****
MDT $69.53 Down -2.76 -3.82%
Medtronic CAPS Rating: ****
STJ $68.68 Down -2.13 -3.01%
St. Jude Medical,… CAPS Rating: *****
SYK $95.46 Down -3.19 -3.23%
Stryker CAPS Rating: *****