Device tax hysteria

There is something about taxes - also known as paying for a civilized society - that just drives a certain segment of the populace crazy. There is no better example than the medical device tax, enacted as a funding mechanism for Obamacare.

The tax is set at 2.3% of sales of medical devices - pacemakers, stethoscopes and the like. Is this unfair, or worse, counterproductive? Well, the device makers certainly think so. "Medical technology companies across the country are struggling to remain competitive..." says Steven Ubi, the president of the industry group Advamed (I used to be a member). According to Senator Dan Coats, one company can no longer afford to continue "...working on solutions to relieve a wheelchair-bound child’s discomfort" because of the tax. Oh my, Obama is going after crippled children now. The Wall Street Journal says the tax is "...bound to destroy startups and stunt medical-device innovation in the U.S. and thus the quality of health care world-wide." So it's not just crippled children, it's the whole world that will suffer.

Really? A 2.3% tax is going to bring a flourishing industry to its knees? Someone should tell investors. The iShares Medical Device Index (IHI) has posted 14% annualized returns in the three years since Obamacare was passed. Since the tax was implemented at the start of this year, returns are 16%.

It's not too hard to figure out why investors, as opposed to self-dealers and gasbags, are not worried. Gross profit margins (sales receipts minus production costs) are typically 60-70% in this industry. Hospitals, who are the primary customers, typically markup this sales price another 100% or more when billing patients and insurers. 2.3% is not the end of an industry. It's not a crippling death blow. It's just noise.

About 50 million Americans lack health insurance, 16% of the population. If Obamacare cuts this number in half, medical device manufacturers will see a market increase three times as large as the device tax. That's why their stocks keep going up - they are about to get tens of millions of new customers. You'd think the manufacturers would be, if not actually grateful, at least discreetly content. But no. They want the new customers, sure. But they don't want any part of paying to bring them into the system.

This is truly swinish behavior.

 

Posted with Blogsy