With the midterm elections now in the rear-view mirror, Americans can begin speculating about the policies that will come out of Washington over the next two years. Personally, I can't say I'm a huge fan of the speculation -- assumptions won't necessarily come to fruition, and focusing on politics in general isn't a great investing strategy.
However, this past week's elections could have a significant bearing on the future of the Patient Protection and Affordable Care Act, better known as Obamacare. With Republicans taking control of both houses of Congress, and their perception of the healthcare reform law decidedly negative, change might indeed be around the corner.
A big change could be coming to Obamacare
Realistically, an entire repeal of Obamacare is probably off the table, and would in general be a bad idea. Hospitals, health-benefit providers, and the healthcare infrastructure backbone have been angling their businesses around the idea of Obamacare succeeding for years. To remove that now and essentially roll back Medicaid benefits for millions of low-income Americans who qualified under the program's expansion could be disastrous.
But Obamacare probably isn't perfect as it is now, either.
A Republican-led Congress could look to eliminate one key component of the Affordable Care Act that has been a key revenue generator, but also a source of angst, for select corporations: the medical device excise tax.
A destroyer of innovation?
The medical device excise tax is a 2.3% tax on medical device revenue; a medical device can be anything from a highly complicated machine that analyzes human DNA down to a syringe used to deliver a vaccine. This tax rubs businesses the wrong way since it is taken from total revenue before any deductions, rather than a company's total profit.
The medical device excise tax also could discourage innovation in the U.S. Medical device makers weren't coy about their opinion of the tax when it was first introduced. NuVasive (NASDAQ:NUVA) CEO Alexis Lukianov, for instance, wrote an op-ed column in the San Diego Union-Tribune that essentially says that the medical device excise tax could force the company to cut jobs and move its operations abroad. Though no precise correlation can be drawn between the tax and device makers setting up shop in other countries, we've been seeing this outsourcing of medical device innovation for years.
For example, cardiovascular device developer Boston Scientific (NYSE:BSX) announced in 2011 that it would pare between 1,200 and 1,400 jobs in a global cost-cutting effort, while also investing $150 million in China and hiring about 1,000 workers there. Again, there's no precise indication this was directed at the medical device excise tax, but similar foreign investments and/or buyouts in the industry have been apparent over the past three years.
A much-needed revenue generator
The medical device excise tax is meant to provide added security to the states that are expanding their Medicaid programs. The congressional Joint Committee on Taxation said in 2010 the medical device excise tax was forecast to bring in an average of $3.2 billion per year during its first decade. This included estimates for just $1.8 billion in revenue in 2013 and revenue growing to $3.4 billion by 2019.
Things the medical device excise tax isn't a huge revenue generator, but the billions of dollars it brings in annually help finance the federal aid the government is supplying to about half of all U.S. states for their Medicaid expansion. Repealing the tax would put a mildly steeper burden on the federal government to make up the difference.
What's likely to happen?
Again, please take any political assumptions with a grain of salt, because there are no guarantees when it comes to politics. However, with a Republican-controlled Congress, it appears to me that the medical device tax probably won't make it through 2015.
This could be immediately beneficial for some of the nation's largest medical device makers, which would be able to revise their earnings estimates a bit higher, and it could actually result in job creation instead of possible outsourcing.
According to data aggregated by Investor's Business Daily, medical device giant Medtronic (NYSE:MDT) paid $112 million in medical device excise taxes in fiscal 2014, Boston Scientific paid $73 million, and Zimmer Holdings (UNKNOWN:ZMH.DL) has estimated the tax will cost the company about $40 million this year. To add some context to these figures, minus the tax Medtronic would see its annual earnings rise by $0.11, Boston Scientific's EPS would jump by $0.05, and Zimmer Holdings' EPS would vault higher by roughly $0.24.
It remains to be seen whether the new Congress will seek to repeal this much-hated tax, but don't be surprised if medical device makers move a bit higher in anticipation of keeping all that excess revenue beginning in 2015 and beyond.