About That Medical Device Excise Tax

We have this term that we use in our company and I am sure a lot of other companies use as well: organic growth. I was hired via organic growth: our existing product line had borne enough profit to fund a full-time engineer to oversee the development of the products still in the pipeline. Essentially, rather than pocketing the profits, the company owners pour it into hiring and R&D.

So, yes, Alec MacGillis, the medical device tax is a shitty idea. I appreciate that you found a couple medical device company owners to quote that happened to support your opinion (claiming an opinion has a plurality based on anecdotes, the oldest form of subpar editorial journalism there is). Yes, Alec MacGillis, the medical device tax will cost this country jobs. And yes, it will slow innovation. I am in a position to know. You, sir, are not.

Let's say I launch a product to market that is a new...um...a new instant x-ray machine. It works in the operating room so that surgeons can get a quick peek inside the body before they close it up to make sure there aren't any foreign objects (like bandages, tweezers, etc...this occasionally happens) in the body cavity. I sell it to them based on the idea that the cost of the device will be orders of magnitude cheaper than a single malpractice lawsuit. I manage to sell one per hospital (it's very portable and can be moved from O.R. to O.R. so they only need one) at a price of $35,000. Of that, 30% is profit. Just for the sake of simplicity, let's say I sell 500 of them a year.
Gee whiz! My company just made $5.25 MILLION in pure profit! I am the owner of an organically-grown company though, so I decide to pour $5 million of that into hiring (50%) and R&D costs (50%) to work on expanding and growth. This gives me $2.5 million to spend hiring kick-ass engineers. Each engineer costs about 125,000 a year for salary and benefits. That means I can hire 20 engineers!

But wait, now we have a medical device tax. And by the way they're taxing gross, not net. So long story short I end up with $5.1 million in profit instead of $5.5 million. After holding back the $250k like above, and split in half for R&D and hiring, I now only have enough money to hire 19 engineers. And my R&D budget, obviously, won't go as far either.
So yes, the medical device tax will cost the biotech industry jobs and will slow innovation.

But then there's a second problem. People like Alec MacGillis seem to think that the logic of "adding 30 million people to the healthcare roll will increase sales and offset any medical device tax losses" is completely obvious and irrefutable. But consider the example above again: I can only sell one x-ray scanner per hospital regardless of patient load. The hospital could do 20% more surgeries a year due to more patients having health care coverage, but because my device is awesome and portable and easy to use, the hospital doesn't need a second unit to cover the extra 20% of people coming through their doors...the medical device tax is applied across the board but the offsetting sales aren't.

Certain groups might say it is a small price to pay. They might say that hiring one less engineer is a tiny sacrifice if the medical device tax helps the PPACA bring 30 million people into the wonderful world of healthcare. But it isn't just one engineer. My company is tiny. I'm not Medtronic. They're going to be in the drink for somewhere around 365 million dollars. That's a lot of engineers. My gut is that medical device companies will slow hiring by at least 2.3%. But it'll probably be quite a bit higher than that.


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