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MedTech Hangs in the Balance as Obamacare Skinny Repeal Fails

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Most of the healthcare community has started to rejoice over Capitol Hill’s regulatory apprise in the recent past. The way the full-Obamacare repeal proposal, Republicans’ prime agenda within their healthcare roster, fell flat on its face, was intense! And things got even stagier when the “skinny" repeal bill also failed to get passable support at the Senate.

We believe the immense support to retain the Affordable Care Act (ACA) or Obamacare came on the heels of the latest cost estimate released by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation’s (JCT). While the Republican bill primarily promises improved insurance coverage from the existing law with significantly lower American premiums, the cost estimate revealed something totally contrary.

Per the report, if ACA is repealed, the number of uninsured people will increase by 17 million in 2018 from the present uninsured number. This apart, average premium in the nongroup market (for individual policies purchased through marketplaces or directly from insurers) will increase 25% in 2018.

Troubled Times for MedTech?

While twists and turns continue to unfold at the Capitol Hill, thus boosting the chances of the existing healthcare policy, the scenario within the medical device space is getting gloomier. Amid such political conundrum, market watchers should be keeping a tab on the MedTech space.

The community had been quite hopeful since the change in power as Trump’s proposed policies always talked about the abolition of the infamous 2.3% medical device sales tax. This dreadful tax, which was commonly addressed as ‘fund of the ACA’, simply took a toll on the entire medical device industry, since its enactment in 2013. This tax was imposed on the selling price instead of net profit, amounting to a stupendous sum, wiping out almost a quarter of the profit at medical technology owners.

A report by FierceMedical Device released at that time revealed that Johnson & Johnson (JNJ - Free Report) made a payment of $180 million as medical device sales tax in 2014. Medtronic (MDT - Free Report) , the legacy Covidien, Smith & Nephew (SNN - Free Report) paid $112 million, $60 million and $25 million, respectively during that year.

This was the story of the industry forerunners. The position of the smaller companies was much worse. Let alone making profits, they were in fact struggling to survive.

Realizing the severe linkage effect of this tax among the MedTech bigwigs as well as small players, finally, from the beginning of 2015, the U.S. House and Senate temporarily suspended it (for two years only). Now, MedTech players find themselves facing a similar situation (from the beginning of 2018 itself), if the policy remains intact.

We note that voters who are in favor of the ACA are also talking about the abolishment of the Cadillac tax (40% excise tax on high-cost healthcare plans), another dreadful fiscal revenue generating means of the Democrats.

Unfortunately, while the Trump administration has been targeting a complete annulment of this Cadillac tax in the near future, it has not come up with any concrete plan to replace MedTech tax yet. The future of the MedTech fraternity thus hangs in the balance.

How the MedTech Community Perceived it to Be?

According to the MedTech community, suspension of MedTech tax would have directly addressed issues like lack of opportunity for research and development, innovation, pipeline development and increased investments needed to accelerate patient and provider access to innovative health care products. This would have also helped in boosting job creation and quality of patient care. Accordingly, they are going all out to shelve this tax.

Going by an article by Peter Sullivan (published in The Hill), following the Congress’s failure to approve the repeal of the existing healthcare law, the trade group for medical device companies is launching a new campaign to push lawmakers to repeal ObamaCare’s tax on medical devices.

What Awaits MedTech Players?

Amid this political cacophony, market watchers have a bearish stance toward the space. While pondering over medical device stocks that stand to gain or lose due to the political gridlock, we find that retention or repeal of Obamacare will actually create a vicious circle within the sector.

On the one hand, if Obamacare stays, MedTech profit will be hit significantly, thus posing challenges for research and development, which is quite expensive.

On the other hand, while the repeal of Obamacare will lead to intensive research and development and creation of expensive cutting-edge MedTech products, there are questions over its effectiveness. This is because with higher number of uninsured, the industry is likely to witness a shrinking customer base post-enactment, indicating a decline in demand for expensive medical procedures and devices.

No matter how the policy shapes up, it will prove to be beneficial as well as challenging at the same time for the players within the space. Investors meanwhile can be hopeful about the fact that the overall impact of the existing policy’s amendment or retention will not be that appalling as it apparently seems.

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