Ever since President Barack Obama’s landmark health care law was passed in 2010, Minnesota’s representatives in Congress have argued over whether it’s been a boon or a bust, and voted — repeatedly — to repeal it or keep it.
They all agree, however, that one part of the Affordable Care Act is terrible: the 2.3 percent tax levied on sales of medical devices. Whether they’re Republican or Democrat, from the city, suburbs, or rural areas, Minnesota’s lawmakers will unfailingly tell you that the medical-device tax is a job-killing, innovation-stifling deadweight on one of America’s most promising industries — and one that just happens to have an outsized footprint in the North Star State.
Third District Republican Rep. Erik Paulsen has been the House’s lead crusader against the tax, but even Democrats who may like and support Obamacare — Sen. Amy Klobuchar, Sen. Al Franken, Reps. Keith Ellison, Betty McCollum, Tim Walz, Rick Nolan — have enthusiastically contributed to the painstaking, five-year quest to get rid of the 2.3 percent tariff on medical devices. They recently scored a huge victory, successfully passing a two-year suspension of the tax as part of December’s year-end budget deal, putting it on pause until December 2017.
How did Minnesota’s ideologically, geographically diverse congressional delegation line up behind not just a tax cut, but against something that was once considered a key component of Obamacare?
A huge presence in Minnesota
Even compared to big states like California and New York, Minnesota is a driver of the U.S. medical device economy; Minnesota has the highest concentration of firms and employees in the country. According to the Minnesota Department of Employment and Economic Development, 28,731 Minnesotans are directly employed by about 610 companies in the medical device sector, trailing only California in the raw numbers, and ahead of New York, Florida, Pennsylvania, and Texas.
What is a medical device, exactly? The functional definition, at least under Obamacare, is extremely broad. Devices that were taxed by the law include what might first come to mind — cutting-edge, expensive items like artificial hearts or ultrasound machines. But the category also includes more everyday items, like crutches and bandages (though an exemption built into the law excludes from the tax items that are marketed to the general public and not primarily intended for use by medical professionals only).
The U.S., the world’s biggest health care spender, is also the world’s leading market for medical devices: the sector accounted for $110 billion in business in 2015, and is projected to grow by another $23 billion this year. As of 2014, U.S. firms accounted for two-thirds of the total revenue collected by the world’s top 40 medical device firms, with Germany in a distant second.
The economic footprint of Minnesota’s medical-device industry goes beyond those directly employed by medical device firms, too. The industry’s supply chain and broader ecosystem supports as many as 100,000 jobs in Minnesota, according to Medical Alley Association, the state’s leading trade group for the medical technology sector. Medical Alley estimates that the industry generated $3.8 billion in economic impact, which it defines as total wages paid to industry employees.
The story of how Minnesota grew into a medical technology powerhouse began in 1949, when the global giant known as Medtronic set up as a medical repair shop in northeast Minneapolis. Other big companies sprouted up in the Twin Cities area in the following decades — including St. Jude Medical and Starkey Hearing Technologies.
By the 1980s and 1990s, there were enough specialized resources and talent that the Twin Cities became a magnet for new firms and those looking to expand from out-of-state. And over the last decade, Minnesota has been the fastest-growing medical tech state in the country, ahead of California and Massachusetts, according to Shaye Mandle, president and CEO of Medical Alley.
“All of this can be traced to Medtronic, which was founded on the business of electricity and implantable devices,” Mandle says. Many Minnesota device companies were founded by Medtronic alums striking out on their own. Mandle adds that busts in the computing tech industry also helped to drive area specialists to the medical device sector.
Today, the Twin Cities boasts some of the top medical device firms in the country. Medtronic — which has operational headquarters in Fridley but is, as of last year, technically based in Ireland — employs roughly 9,000 people at eight facilities in the metro area. Starkey Hearing Technologies employs 1,700 at its Eden Prairie campus, and St. Jude Medical, based in St. Paul, employs around 3,000 people at several facilities. 3M Company, that classic Minnesota corporation, has over 800 people engaged in medical device work in St. Paul.
Several global medical device companies not based in Minnesota still have sizeable footprints here. Boston Scientific Corporation, based in Marlborough, Massachusetts, is the largest, with at least 5,000 of its 23,000 global employees working out of several Twin Cities facilities.
All that industry concentration makes Minnesota a leader in investment dollars and innovation. Since 2009, state medical technology companies have raised $2 billion in investment money. In 2014, Minnesota firms accounted for fully a third of all pre-market approvals granted by the Food and Drug Administration, a key way to measure how many new products companies are generating.
There’s a network of supporting institutions that both reflects and sustains Minnesota’s strength in the medical device industry. Take Medical Alley, which was created by the founder of Medtronic, and is dedicated to advocacy, lobbying, education, and a whole host of other services to support the industry. There’s the University of Minnesota, too, which has a dedicated Medical Device Center for research and training that staff says is the only center of its kind in the world.
DEED Commissioner Katie Clark Sieben says that the impact of the sector isn’t limited to the Twin Cities metro. Nationally, she says, “we are on the map and we are known, in part because of companies like St. Jude Medical and 3M and Smith’s and Medtronic.”
Those companies, Sieben says, have spurred innovation statewide, including helping to sprout many other small businesses. Rep. Paulsen says that the vast majority of medical device firms — about 80 percent — have fewer than 50 employees.
While it’s important, the medical device industry in Minnesota isn’t the state’s largest economic engine. It doesn’t compare to the size and scope of the agriculture industry, for example. In 2015, that industry’s sales alone were calculated at $19 billion in Minnesota. The state is a top producer of many agricultural products, like sugar beets, turkey, and sweet corn, and is home to some of the nation’s top agribusiness firms, such as Cargill, Hormel, General Mills, and Land O’Lakes.
But Minnesota’s top single export isn’t turkey — it’s medical devices, and there were $3.6 billion worth of them in 2014. And unlike agriculture, the medical device industry is big in very few places: only 13 states have more than 10,000 workers in the industry.
The industry spends a lot to influence Congress
The cynic might say that the strong, bipartisan Minnesotan opposition to the medical-device tax is born less out of the industry’s economic importance to the state and more out of the political influence that the money has allowed the industry to cultivate.
The medical device sector comprises a small but not insubstantial portion of the vast sum that pharmaceutical and health companies spend lobbying Washington each year. In 2015, that entire industry spent $179 million lobbying members of Congress, according to OpenSecrets.org, which tracks lobbying activity and campaign contributions.
The biggest chunk of that total comes from the pharmaceutical industry, with major corporations like Pfizer, Bayer, and Merck kicking in at least $5 million each. But even among these giants, Medtronic — which has an office in Washington — was a leading contributor, spending about $3.4 million on lobbying. That’s about as much as corporations that most Americans consider to be D.C. power players, like BP and Monsanto, and far more than others, like JPMorgan and Goldman Sachs. Medtronic’s lobbying expenditures dwarf those of other big Minnesota companies: it spent three times as much as General Mills, and a million and a half dollars more than 3M.
Medtronic’s money went toward lobbying on 19 different pieces of legislation in 2015, including the 21st Century Cures Act, a law that medical device firms like because it will speed up the FDA’s approval process for their products. Beyond Medtronic, Boston Scientific spent $1.2 million on lobbying, and St. Jude Medical spent about half a million dollars.
Medtronic was ramping up its lobbying during the George W. Bush administration, but it went into high gear in 2008, as the national health care debate took center stage. While last year’s lobbying totals are lower than at the height of the Obamacare lobbying frenzy, Medtronic is still spending far more now than it did during the Bush administration.
Beyond direct lobbying on legislation, Medtronic, St. Jude Medical, and Starkey Hearing Technologies have also all been active campaign donors in the past few election cycles:
Medtronic and St. Jude have spread the wealth evenly between Republicans and Democrats, while Starkey has given almost exclusively to Republicans. Nevertheless, all the recipients of medical device money support getting rid of the tax to some extent. Here’s how much sitting Minnesota members of Congress have raked in since 2010:
The only member of the Minnesota delegation to receive no contributions from the big players in the medical device industry was Rep. Collin Peterson. Peterson supported a bill repealing the tax last year.
The three companies often cover their bases and give to challengers, too. Mike McFadden, Franken’s 2014 challenger, received over $25,000 — more than Franken. Jim Graves, former Rep. Michele Bachmann’s Democratic challenger in 2012, got several thousand dollars, too.
The 2016 spending cycle is young, but already, Reps. Paulsen, Emmer, McCollum, and Walz have received contributions from Medtronic.
What if the medical-device tax is just bad policy?
The fact that the industry lobbies so hard in Washington, and that many of its champions receive not a few campaign checks, might be all the information some people need to understand why Minnesota’s representatives have fought the medical-device tax. But those representatives themselves might offer a simpler (and more virtuous) explanation for their opposition to the tax: it’s just bad policy.
So why was it included in the Affordable Care Act in the first place? It’s not like the White House or its congressional allies had it out for the medical device industry. Quite the contrary: this particular industry is seen as especially important by some politicians. It’s at the intersection of manufacturing, high tech, research and development — the stuff of stump speeches, a shining exemplar of the kind of business both Republicans and Democrats say needs to thrive in order for America to thrive.
But at the heart of the case for the medical-device tax were two major concerns: making Obamacare affordable and reining in the cost of health care in America.
The medical-device tax was considered a key way to raise revenue to pay for the health care law. The duty of 2.3 percent, to be implemented in 2013, was projected to raise around $29 billion over 10 years. (The levy was initially meant to be double that, but anti-tax lawmakers successfully cut it down.)
In March 2015, the Congressional Budget Office projected Obamacare would cost $1.2 trillion over the course of a decade. That means medical-device tax revenue would, in theory, cover about 2.5 percent of Obamacare’s total costs — a fairly significant contribution from a single tax.
Obamacare’s architects also believed that the law would provide a special benefit for medical device companies: expanding health insurance to millions more Americans, they thought, would expand access to medical devices and drive even greater demand for them.
At the same time, they wanted to find ways to control health care costs, which were ballooning to record levels when Obama took office. Since devices would be taxed at 2.3 percent of their cost, the law’s writers believed the tax would give hospitals — which usually buy devices, not insurers — an incentive to purchase cheaper products.
Immediately after the tax was introduced, medical device industry advocates forecast that it would depress the industry’s growth — in jobs, new patents, and in investor dollars — dealing it a major blow, in the midst of a major recession, exactly when it needed a boost. Today, they maintain they were proven right — but there’s a substantial amount of disagreement as to just how deeply the tax has affected the industry.
In a 2014 Wall Street Journal op-ed, Rep. Paulsen outlined the thrust of industry backers’ claims, arguing that as many as 33,000 workers in the U.S. medical device sector have been laid off as a result of the tax.
In interviews and statements to MinnPost, Paulsen and Klobuchar recalled hearing constantly from business owners that the medical-device tax ended up preventing them from hiring more people and researching new technologies. “What the device tax means to the community,” Paulsen says, “is, you have two fewer projects, a couple less engineers, borrowing from banks to pay off the tax.”
According to Arthur Erdman, director at the U of M’s Medical Device Center, the tax “really hurt at all levels… If you were a venture capitalist and considering putting money into a startup medical device company, those people walked away.” In the startup world, where real return on investment may not occur for years — this is particularly true in the medical tech sector — it hits especially hard.
“Profitability is way downstream” for these kinds of companies, Medical Alley’s Mandle says. “If you start asking companies who are trying to get to profitability or hire one more person, to start paying a tax when they’re $80 to $100 million in debt to have gotten there, it would have a huge impact on entrepreneurship.”
But are any of those doom-and-gloom claims true? For observers in the policy world, and for fact-checkers in the media, tales of major job loss and stifled innovation in the medical device industry don’t add up.
The nonpartisan Factcheck.org examined job-loss claims made by the industry’s boosters in Congress — such as Paulsen’s 33,000 figure — and found that these numbers were exaggerated thanks to overly generous math on the part of the industry’s advocates. (Much existing research comes from AdvaMed, the industry’s official trade group in Washington.) As of October 2013, Factcheck’s analysts found that perhaps 9,000 jobs in the sector — at the very most — have been lost due to the tax.
Beyond that, a Washington Post article fact-checking the claims of Paulsen and others also found holes in their claims. It cited a January 2014 survey in which about nine percent of U.S. medical device firm managers said they did not have to lay anyone off because the tax; fully half of the respondents said they didn’t change how they did business at all as a result of the tax.
Some experts have suggested, or claimed outright, that the industry has exaggerated the effects of the tax. The left-leaning Center for Budget and Policy Priorities issued a paper in February 2015 that sought to debunk anti-tax arguments and defended it as an important revenue stream for Obamacare.
The tax, for example, hasn’t prompted companies to move employment offshore, as some device tax opponents have claimed, according to the paper. Even the companies themselves say that offshoring has not happened as a result of the tax. Covidien, the Irish company acquired by Medtronic in 2015 so it could move its base there, said in 2012 that the tax has never prompted them to move jobs out of the U.S. or eliminate them. However, Boston Scientific, which has a substantial Minnesota presence, said in 2013 it would lay off 1,000 employees, in part because of the tax.
And, the CBPP paper notes, the tax makes the ACA less of a drain on the federal deficit. That concern has led Democrats to support repealing the tax while insisting lawmakers account for that $29 billion in lost revenue somewhere else.
What about device backers’ claims that the tax has scared away investors? Recent numbers show that, on the whole, Minnesota firms are doing just fine. According to Medical Alley, 2015 was a record year for investing: Minnesota firms raked in a total of $434 million in investment dollars, a seven-year high.
With all of those points in mind, it’s difficult to paint a comprehensive, accurate picture of how the medical device industry has fared in the Obamacare era, but the Government Accountability Office — which provides auditing and investigative resources for Congress — attempted to. In June 2015, it released a report that revealed mixed outcomes for the industry in the last five years.
The GAO studied 102 medical device firms, from large companies (including Medtronic and St. Jude) to mid-sized and small firms. Overall, the audit found that from 2005 to 2014, medical device companies’ profits increased by 43 percent, even through the difficult recession years.
That prosperity wasn’t spread evenly, however: the 30 biggest companies accounted for 95 percent of net sales annually, and the smallest 37 accounted for one percent of that total.
The GAO found, too, that smaller firms’ sales gains remained stagnant while medium- and large-sized gains rose. Medtronic, for example, pulled in $13.9 billion in profits during the last fiscal year, a three-year high.
While the GAO’s findings were mixed, the firms surveyed remained cautious about the future. Three-quarters of the companies said they were not certain about the health care law’s full impact on their businesses; more than half of the firms believed the medical-device tax had, or may have, a negative impact.
Toward full repeal
Whatever the tax’s merits, medical device industry advocates and their allies in Congress — including Minnesota’s entire congressional delegation — have made it clear they won’t rest until they achieve its full repeal. December’s two-year suspension was a victory, to be sure, but it was not the final objective.
It took considerable time and effort even to get to this point. Paulsen says that he spent years trying to make the issue more personal for his colleagues. “I’d seek out members, Democrat and Republican, on the House floor, explained why I was doing it, if there was a connection to a company in their district that I knew about, I would reference that and make a point of it,” he says.
Congress, of course, does nothing fast — much less a major change to a huge law. The fact that Paulsen, Klobuchar, and Franken would push for the repeal of the tax became a given in every session of Congress since Obamacare became law. On several occasions — most recently, last summer — bills to repeal it received strong majority votes in the House, only to stall in the Senate. (However, in 2013, the Senate passed an amendment to repeal the tax on a nonbinding budget resolution.)
It’s not that the medical-device tax doesn’t have plenty of opponents in the upper chamber, but there, much more Democratic support is needed to move legislation. And other Democrats who want to repeal the tax — like Massachusetts Sen. Elizabeth Warren and New York Sen. Chuck Schumer — believe, along with Klobuchar, Franken, and others, that voting for a repeal is conditional on making up the revenue that would have been raised by the tax from another source.
Beyond that, plenty of Senate Democrats are in favor of keeping the tax. Twelve of them voted against the 2013 amendment — including, notably, then-Majority Leader Harry Reid of Nevada. Reid, who is now Minority Leader, has called the idea of repealing the tax “stupid.”
Ultimately, tax opponents like Paulsen and Klobuchar were hoping for something like the big, year-end tax deal — a must-pass bill that they could staple a repeal or suspension to, allowing it to proceed to the president’s desk with minimal drama.
Paulsen, who called the passage of the suspension a “surprise relief,” says it gives Congress time to figure out how to make the temporary policy into permanent law — perhaps, he says, as part of a broader tax reform package that he and other lawmakers very much want.
Klobuchar called the suspension a “great step,” and said it provides needed relief to the industry while giving Congress time to work on a long-term solution with an offset. She pointed out that the CBO’s projection on Obamacare’s long-term costs found that the health law will cost $176 billion less than predicted, but that the extra money can’t be used to make up for the medical-device tax. The fact that, as of 2014, the tax was only raising about three-quarters of the revenue initially forecast — leading to a 10-year projection of $24 billion — might factor into these calculations, too.
“That’s why a more extensive discussion needs to take place to either find a pay-for or to repeal the tax while accounting for the fact that the [ACA] has ended up costing less than originally predicted,” Klobuchar said. “This is a tax on manufacturing, innovation, and research at a time when we need manufacturing to be strong.”
The medical-device tax, loathed as it may be by some, is just one of many factors that affects this complicated business. And with few exceptions, most metrics indicate that business for this industry is far from bad.
But a tax is a tax, and this one hasn’t been finished off just yet. The same kind of methodical effort that led to the passage of the suspension will be needed to secure a permanent repeal. Minor policy quibbles aside, Minnesota’s lawmakers are determined to make it happen.
Correction: this article has been corrected to accurately reflect the number of people employed in Minnesota by several medical device firms.