Photographer: Drew Angerer/Bloomberg

Congress Moves to Pause Obamacare Taxes, Causing Barely a Ripple

  • Device-maker layoffs, employer coverage changes tough to undo
  • Bill delays levies on devices, insurers, Cadillac plans

A set of delays on Obamacare-related taxes in the new federal spending bill will give corporate earnings a modest boost but are unlikely to undo the law or produce significant changes in the health-care industry.

Medical-device companies such as Medtronic Plc, health insurers like UnitedHealth Group Inc., and big employers across the U.S. have been preparing for years for a slate of new taxes under the Affordable Care Act. They’ll find it easier just to collect extra profit from a tax cut rather than undo those changes, such as job reductions and revamped health benefit plans.

The legislation pauses or delays three sources of funding for Obamacare: a 2.3 percent excise tax on medical devices that started in 2013; a 40 percent levy on high-cost health insurance plans, known as the Cadillac tax, that was supposed to start in 2018; and health insurer fees that have already begun. The changes will cost more than $30 billion, according to the Joint Committee on Taxation, which evaluated the proposals over a 10-year period.

The House of Representatives is expected to vote on the legislation on Thursday, while the Senate aims to vote Friday. Terry Haines, a policy analyst at Evercore ISI, said the suspension of the medical device excise tax and a two-year delay for the "Cadillac tax," an added fee for employers who offer their workers high-cost health insurance plans, were a "near certainty." President Barack Obama is expected to sign the bill.

Labor Unions

Republicans are attacking funding for expanded health insurance after failing to get the Affordable Care Act overturned by the U.S. Supreme Court or shot down broadly in Congress. But some Democrats have also favored repealing these taxes. The Cadillac tax, for one, has faced opposition from labor unions whose members have extensive insurance coverage.

The $30 billion in foregone revenues is just a small portion of the revenue and spending tied to the 2010 health-care overhaul, said Jared Bernstein, an economist at the Center on Budget and Policy Priorities who formerly worked for Vice President Joe Biden.

“The funding loss isn’t big enough to fundamentally undermine health reform,” he said. There are still “a significant number of policymakers who are trying to kill it at every turn. They haven’t been able to do that legislatively so they’re going to try and cut off its revenue.”

The Affordable Care Act has helped bring health coverage to about 17.6 million previously uninsured people. The 2010 law gave federal funds to states that expanded eligibility for Medicaid and also provided subsidies for individuals to buy health insurance. The Centers for Medicare and Medicaid Services said today that about 4.2 million people have picked 2016 coverage on the federal insurance marketplace created by the law.

Under Pressure

With the Cadillac tax looming, employers had been under pressure to hold down their health-insurance costs, in part by sharing more of the expenses with workers -- raising deductibles and copays -- and limiting some benefits. The average annual deductible for an individual in an employer health plan has climbed 67 percent since 2010, to $1,077 this year, according to the Kaiser Family Foundation.

About a third of employers were at risk of paying the Cadillac tax in 2018 if they didn’t adjust their health benefits, according to Mercer, the benefits consulting unit of Marsh & McLennan Cos. The Cadillac tax is assessed on health-insurance premiums over the limit of $10,200 for individuals or $27,500 for families.

But the Cadillac tax is just one of many rising health-care costs employers are still contending with, meaning the trend toward cost-sharing with employees is likely to continue.

Neither will the tax moves lead to more innovation in the medical-device industry, which has already picked up steam in recent years, said Jason McGorman, an analyst at Bloomberg Industries in New York. The suspension will reduce corporate costs and may benefit smaller companies that are struggling to grow while shouldering those fees, he said. For companies worth $1 billion or more, the impact will be negligible.

"It’s basically a benefit to their earnings," he said. "From a health care perspective, it’s not a big deal. It’s not going to save the health care system money. It won’t change how much they invest in R&D. Even if they permanently repealed the device tax, it probably wouldn’t significantly change things."

2,800 Workers

Device makers including Medtronic, St. Jude Medical Inc. and Boston Scientific Corp. started reining in costs and cutting jobs in 2011 to prepare for the tax on their products. The three companies attributed the dismissal of a total of 2,800 workers at least partially to the levy.

The medical device tax was originally designed to raise $29 billion over a decade to help pay for Affordable Care Act. The industry actually paid about $3.1 billion in 2013, the first year the excise tax was in place, according to the Joint Committee on Taxation.

The suspension of the tax will boost earnings per share in the medical device industry by about 2.9 percent in 2016 and 2.8 percent in 2017, said Larry Biegelsen, an analyst at Well Fargo in New York. Companies with the highest sales in the U.S., including Integra Lifesciences Holdings Corp., NuVasive Inc. and St. Jude, would benefit the most, he said.

"At the very least, we believe a two-year suspension of the medtech tax provides additional financial flexibility for most medtech companies in 2016 and 2017," Biegelsen wrote in a note to investors. While the suspension is a compromise for the industry and its congressional supporters, “a two-year delay lays the groundwork for future delays or an outright repeal in our view," he said.

Some Benefits

Health insurers, meanwhile, have largely passed on the cost of their fee to their customers. The insurer tax applies to business lines including private Medicare, Medicaid and individual plans. The one-year pause in the tax will boost earnings at UnitedHealth Group Inc. by about 3 percent in 2017, while Humana Inc. could see an 8 percent earnings increase., according to Ana Gupte, an analyst at Leerink Partners.

There are some benefits beyond corporate profits in the spending bill. Some insurance plans will pass on their savings, a boon for companies and patients.

“The health insurance tax drives up the cost of coverage,” said Clare Krusing, a spokeswoman for health insurance lobby America’s Health Insurance Plans, in an e-mail. “Repealing or suspending this tax would be a victory for seniors, small business owners, and middle-class consumers.”

And the bill, which would avert a U.S. government shutdown, would make permanent the tax credits for spending on research and development spending, which could aid health-care companies. Currently those tax credits must be renewed every year, making it challenging to make forecasts. Boston Scientific and Abbott Laboratories are two of the few companies that don’t assume the credit will be extended in their guidance, Biegelsen wrote.

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