Device makers bid good riddance to job-killing Obamacare tax

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BOSTON – A budget deal reached in Congress temporarily shelved a controversial tax on medical devices that industry leaders in Massachusetts claim has cost jobs and slowed innovation.

The medical device excise tax, enacted as part of the 2010 Affordable Care Act, imposes a 2.3 percent surcharge on sales of equipment by manufacturers and importers and was projected to raise $38 billion over its first decade to help fund the massive overhaul of the nation’s health insurance market.

The tax has caused manufacturers to cut costs through delayed expansions, relocated manufacturing operations, and scaled back research and development, Tom Sommer, president of the Massachusetts Medical Device Industry Council, said in a statement. He cited a survey released in mid-December of his organization’s members which showed that more than two-thirds of the 24 companies that responded to the survey had slowed or halted new-job creation since the tax took effect in January 2013.

“The MassMEDIC survey results show that medtech manufacturers from Massachusetts and the surrounding region are reducing R&D expenditures, delaying expansion and seeking less costly, off-shore locations for manufacturing operations,” Sommer said.

About half of the respondents said they had put off or canceled capital investments because of the tax, while a similar proportion said they had moved operations or expanded outside of Massachusetts, according to GrantThornton, the consulting firm that conducted the survey. The survey was distributed to 197 members of MassMEDIC, though only about a quarter of those responded.

While almost all the respondents said the tax had led them to cut jobs, it wasn’t clear how many had actually done so. The companies responding said they had reduced employment by as much as 25 percent, with one saying as many as half its jobs were cut. But others said they had “reduced employment” by 0 percent, or none.

Sommer described the results as evidence of the tax’s “devastating impact on medical device operations in our region.” The survey showed scant increase in demand for company products or services because of expanded availability of health insurance, with respondents reporting no more than a 5 percent increase in revenue or the size of their customer base.

The two-year suspension of the tax will give manufacturers a chance to adjust, Sommer said. The freeze was included in a $1.8 trillion spending deal reached by Congress just before a holiday break that began before Christmas.

The effects of Obamacare, as the Affordable Care Act is commonly known, on U.S. employment and the economy remain bitterly contested. According to a new assessment from the nonpartisan Congressional Budget Office, the law will reduce the labor supply by the equivalent of 2 million jobs by 2025, partly because of increased effective tax rates that may lead some workers to cut back on their working hours.

The most pronounced effects will be seen among workers who earn lower wages, with a a drop in the labor supply from this group estimated at 1.7 percent, the budget office said, citing the total number of hours worked as its measure. The study said one effect of the law, increased subsidies, “will make it easier for some people to work less or stop working without losing health insurance.”

The law requires companies offer full-time employees – which it describes as those working more than 30 hours a week – health insurance. Critics say that has motivated companies to shift to part-time employees and strictly mandate these workers stick to schedules of less than 30 hours.

Last year, compiled a lengthy list of companies thought to have made cost-cutting employment moves to escape the law’s mandates. Two Massachusetts-based businesses – Staples and Worldwide TechServices – were among those identified on the site, which operated by Investor’s Business Daily, a newspaper.

The list is based on anecdotal evidence, including unofficial reports. Staples officials have denied any link between their work scheduling practices and the law.

Following the introduction of health insurance mandates imposed under Massachusetts law years before Obamacare was passed, Bay State companies probably would have made adjustments well before the federal law kicked in, Christopher Geehern, a spokesman for the Associated Industries of Massachusetts, said in an interview. Though the 2006 state law defined a full-time employee as one working 35 or more hours a week, the difference between the two systems is not massive, he said.

“Massachusetts is really a different case than other states,” Geehern said. “I really do think that for Massachusetts employers, this is really old hat for them. While the rules are not exactly the same, they are familiar conceptually with this whole idea of providing insurance. I think it’s far less of an adjustment here than in a state where you had no history of this.”

Where employers are seeing costs increase is in new paperwork, said Geehern, whose organization represents about 4,500 firms in the state. Companies are spending between $5,000 and $20,000 to meet the ACA’s reporting requirements, which go into effect in the first quarter of next year, he said.

“The reporting requirements turn out to be pretty burdensome and pretty expensive and the potential penalties that employers are looking at for filing incorrect forms runs $250 per form up to a max of $3 million,” he said.

Though that has spurred companies to hire professionals to handle the paperwork, either in-house or through an outside payroll firm, Geehern does not consider that spending a positive for the overall market.

“We would say it’s not good for the economy whenever you have to spend corporate resources on overhead and government paperwork,” he said. “We think it’s a good idea that employers spend money on health insurance, but every dollar that you spend complying with the federal paperwork is a dollar that you cannot put into providing coverage for employees.”