The Affordable Care Act was under assault from the White House and Republican lawmakers throughout 2017, with many calling for its complete repeal. Although opponents of Obamacare didn't manage to get rid of the program entirely, victories like the elimination of the individual mandate tax penalties effective in 2019 marked steps forward in their efforts to replace the healthcare reform law.
One much-hated part of the Affordable Care Act is a tax on makers of medical devices. The controversial tax has been suspended in the past, but as of Jan. 1, the medical device tax came back in full force. Now, some lawmakers are looking to repeal that Obamacare tax once and for all -- but they're not the ones you might expect to be at the forefront of a provision that would weaken the Affordable Care Act.
What Elizabeth Warren and Ed Markey want to do
Last week, Massachusetts Sens. Elizabeth Warren and Ed Markey introduced legislation that would eliminate the tax on medical devices under the Affordable Care Act. The aptly named No Taxation on Device Innovation Act would permanently eliminate the 2.3% tax that manufacturers of everything from surgical robotic systems to pacemakers will have to pay in 2018 without further action.
At first glance, Democrats supporting a move to kill a piece of Obamacare might sound unlikely, but this isn't the first time that Markey has made the proposal. As the senator noted, the act is aimed at helping to keep those who actually pay for care using taxed medical devices from bearing the burden of the financial levy, while also "continuing to invest in a medical device industry that is key to [Massachusetts'] culture of innovation." Warren's comments were similar in tone, with her intent to help make it so that "Massachusetts device companies can continue to innovate and save lives." Warren has also taken steps to eliminate the medical device tax in the past, voting for an amendment to repeal the measure back in 2013.
The Democratic senators didn't make the move entirely independent of partisan politics. In order to pay the cost of getting rid of the medical device tax, Warren and Markey suggested removing $29 billion in oil company tax breaks as an offset. Nevertheless, the stance on principle against the Obamacare tax will be surprising to many who see Washington gridlock as an irresolvable problem.
Why so many people hate the medical device tax
The biggest problem with the medical device tax is that the measure imposes a 2.3% levy not on profits but rather on sales of devices. That means that even if a company isn't making money, it will still owe the tax, thus deterring up-and-coming businesses from getting into the field and coming up with potentially life-saving innovations. Even if a company is profitable, the percentage of profits lost to the tax will inevitably be greater than the actual tax rate.
For instance, Intuitive Surgical (NASDAQ:ISRG) reported net income of about $900 million on almost $3 billion in revenue over the past 12 months. If the tax had been in effect during that period, it would have amounted to 2.3% of that $3 billion, or almost $70 million. The hit to Intuitive Surgical's profits would have been almost 8%. For Boston-area heart-related equipment specialist Abiomed (NASDAQ:ABMD), which had earnings of $92 million on about $500 million in revenue, losing almost $12 million to the tax would take away almost an eighth of the company's profits. Meanwhile, for tiny companies like TransEnterix (NYSEMKT:TRXC), revenue of $3.76 million would lead to tax of less than $100,000, but that's still adding insult to injury for a company that reported $82 million in losses over the past 12 months.
The tax was suspended during 2016 and 2017. Yet Republicans failed to include it in their final tax reform package, perhaps hoping that they could deal with it in a side arrangement such as the one that Warren and Markey have proposed. As a result, it came back to life at the beginning of 2018, and industry trade groups are scurrying to try to get the matter resolved once and for all.
Eating away at Obamacare
Many political commentators had doubted whether Congress would be able to repeal the medical device tax, especially given the fact that since it wasn't included as part of tax reform, a 60-vote majority in the Senate is likely. With Democrats like Markey and Warren on board, however, Obamacare opponents might be able to take one more bite out of the law if they can agree on the specifics.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool recommends Abiomed. The Motley Fool has a disclosure policy.