Few laws have been as controversial, and remained as controversial for so long, as the Affordable Care Act.
The ACA, which you probably know better as Obamacare, was signed into law in March 2010. It was designed to completely revamp the U.S. healthcare system by changing the way we select health insurance, as well as reinvent how medical care is administered. Although Obamacare had nearly 9.95 million paying members as of the end of June 2015, certain aspects of the law simply haven't sat well with investors.
Two big reasons the public dislikes Obamacare
For example, the individual mandate has often been viewed as a highly polarizing component of Obamacare. The idea that consumers will be told they "have" to purchase health insurance or face a penalty when filing taxes isn't exactly rallying support around Obamacare. The shared responsibility penalty is in place to encourage healthier young adults to enroll for health insurance, because insurers need the premium payments of these heathier individuals to counteract the high medical costs associated with treating sick members.
However, another component of Obamacare has arguably drawn equal angst from consumers and businesses alike: the medical device excise tax.
The medical device excise tax, which was implemented in 2013, levies a 2.3% tax on the total revenue of medical devices sold within the United States. The major concern with the medical device excise tax has always been that it would discourage innovation. A number of device developers threatened to move their operations overseas in the wake of its passage in order to escape the tax, and a few actually wound up investing R&D dollars in emerging markets like China.
But big changes are on the way for this hated tax.
This hated tax is history (for now)
Last week, President Obama officially signed a new spending and tax bill into law which is set to go into effect in 2016. One provision within the bill that had to spark some degree of excitement was the suspension, albeit temporary, of the medical device excise tax for the next two years.
Before you get up in arms about the total cost of Obamacare, it's important to keep in mind that the cost of the program over the next decade has actually been falling. Initially, the Congressional Budget Office estimated that Obamacare would cost $1.35 trillion between 2016 and 2025. However, a revision to the CBO's estimates now pegs Obamacare's full cost at $1.207 trillion between 2016 and 2025, a reduction of 11%. All in all that's still a huge cost, but at least it's trending in the right direction.
It's also worth noting that the medical device excise tax was never designed to be a large revenue generator for Obamacare. The medical device excise tax was only expected to generate $24 billion for Obamacare over the next decade. The money generated from this tax helped pay, albeit marginally, for the expansion of Medicaid in select states, as well as for subsidies of eligible enrollees. Yes, removing this tax for two years will likely add to any potential Obamacare funding deficits claimed by opponents of the law, but its suspension is unlikely to materially impact the bulk of revenue being collected.
Who this deal really benefits
It's medical device makers, though, that have got to be ready to uncork the champagne. The medical device excise tax may not have been a major long-term contributor to Obamacare, but it was making a sizable enough dent in the pocketbook of device makers.
Two big names in this space that stand to benefit are Medtronic (NYSE:MDT), which recently acquired Covidien and redomiciled its headquarters to Ireland where corporate tax rates are much lower, and Baxter International (NYSE:BAX). Not surprisingly, these were also two of the biggest medical device spenders when it comes to Congressional lobbying last year. Medtronic and Baxter racked up bills of more than $5 million and nearly $3 million in lobbying expenses in 2014.
According to a 10-K filing with the Securities and Exchange Commission, Medtronic paid $135 million in medical device excise taxes in fiscal 2015, up from $112 million in 2014, and just $21 million in 2013. Per the filing, Medtronic estimates the tax could cost the company $20 billion over the coming decade.
By a similar token, cardiovascular-focused stent and device maker Boston Scientific (NYSE:BSX) claimed to have paid $72 million in excise taxes in 2014, down $1 million from the $73 million it forked over in 2013. Had Medtronic and Boston Scientific been able to keep this money as income in their most recent annual filing, Medtronic's full-year EPS would have been almost $0.10 higher, and Boston Scientific's full-year EPS would have been about $0.05 higher. That's not huge by any means, but for Wall Street every penny often counts when it comes to assessing a company's performance. Those extra pennies in per share profit may, over time, add market value to these companies.
The future of the medical device excise tax
It's unclear at this time if the medical device excise tax suspension is going to remain permanent beyond the next two years, or if this hated Obamacare tax is going to wiggle its way back into the 2018 budget. The answer to this will likely depend on which political party is in charge of the White House and Congress. Meanwhile, it probably means device makers will have a little extra pep in their step for the next two years.
What'll really be worth watching is if we see medical device companies taking the extra cash that would normally have gone to pay the medical device excise tax and reinvesting it into jobs, research, and manufacturing facilities within the United States. If Congress sees this happening, it could be really difficult to attempt to reintroduce the medical device excise tax in a future federal budget.