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So they say...

This is about the new 2.3% tax on medical devices manufactured here.. the tax is to help provide funding for the ACA.

(note: with more people in our health care system, there will be increased demand
for medical devices; the thinking is increased sales/revenue by companies like Cook can offset the 2.3% tax. tip to Hoosier Al for this info.)

A med-tech company says it's scrapping plans to open five new plants in the Midwest because of the 2.3 percent medical-device tax that goes into effect next year to help pay for the new federal health care law.

Cook Medical Inc., a Bloomington, Ind.-based company that makes a variety of medical devices, told the Indianapolis Business Journal that the federal tax will cost it between $20 million and $30 million annually.

That's enough to force the company to abandon plans to build five plants over the next five years, said Pete Yonkman, Cook's executive vice president of strategic business unit. Cook recently spent $30 million to renovate a Canton, Ill., plant that was abandoned by International Harvester Corp.

Yonkman said the company will instead look to expand internationally. It already has production facilities in Australia, Denmark and Ireland.

Minnesota politicians and med-tech company leaders have been complaining about the medical-device tax that goes into effect next year and is expected to raise about $2.9 billion per year to help pay for President Obama's new federal health care plan.

Earlier this year, Medtronic Inc. said the tax will cost the Fridley-based med-tech giant as much as $175 million a year. Medtronic Chief Financial Officer Gary Ellis told Bloomberg that the company is trying to figure out how much of the tax it can pass on to its customers.

“We’re going to have to make the tradeoffs, and there’s probably going to be things that we can’t do as a result of that. It means we won’t have as much to invest going forward," Ellis said.

OK, there's something rotten in Denmark here.

First, why can't Cook Medical tell us exactly what the new tax is going to cost them annually? Obviously $30 mil is alot more than $20 mil per year. I suspect it's a projection-- based on maybe building the five new plants in the midwest.

two, the Illinois state budget is a mess. If Cook Medical was counting on huge tax incentive from IL and other states where they were looking to build new factories, they're are probably not getting this. Obviously this has an impact on decision making around business expansion over the next five years.

it appears there's more to this than the 2.3% tax.

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Comment Preferences

  •  Tip Jar (11+ / 0-)

    "A civilization which does not provide young people with a way to earn a living is pretty poor". Eleanor Roosevelt

    by Superpole on Thu Aug 02, 2012 at 05:52:54 AM PDT

  •  Probably a crappy product. n/t (0+ / 0-)

    "The disturbing footage depicts piglets being drop kicked and swung by their hind legs. Sows are seen being kicked and shoved as they resist leaving their piglets."

    by Bush Bites on Thu Aug 02, 2012 at 06:01:58 AM PDT

  •  Q: Since when did it make any difference to (10+ / 0-)

    medical device manufacturers what the total price of medical device turned out to be?

    A. Since the last time a patient was told he'd die without a pacemaker sat up and said, "But how much will it cost?"

    I'm sure the companies are not planning to absorb this cost themselves.

    Believe me, there's a fortune in making/selling medical devices. A pretty good gig for some of the doctors who get a little on the side for helping with the deal, too.

    Eliminate tax breaks that stimulate the offshoring of jobs.

    by RJDixon74135 on Thu Aug 02, 2012 at 06:06:02 AM PDT

  •  Google "Cook Medical lawsuit" and you can find... (12+ / 0-)

    ....several million reasons why they'd be slowing expansion plans.

    "The disturbing footage depicts piglets being drop kicked and swung by their hind legs. Sows are seen being kicked and shoved as they resist leaving their piglets."

    by Bush Bites on Thu Aug 02, 2012 at 06:10:00 AM PDT

  •  From what I hear (5+ / 0-)

    that tax may be poorly designed, and probably does act as a disincentive.  If I remember right, it was one of the series of compromises that got the Senate bill out of committee, but it wasn't quite as egregious as the "Cornhusker kickback" so it didn't get stripped in the final reconciliation that got the whole bill passed.

    The problem now is that the tax is needed to keep the ACA revenue neutral, and if it's going to be tweaked -- or even removed -- we're going to need bipartisan support in Congress to make up the shortfall.  Given the intransigent Republican opposition to the bill their own ideologues essentially wrote back in the 1990s, getting them to sign on to a fix is going to be impossible.

    They'd much rather have the headlines to prove the ACA is a job-killer.

    GOP cynicism knows no bounds.

    Give me your tired, your poor, Your huddled masses yearning to breathe free
    ¡Boycott Arizona!

    by litho on Thu Aug 02, 2012 at 06:10:09 AM PDT

  •  using projected sales number and price (2+ / 0-)
    Recommended by:
    Superpole, johnny wurster

    Actually, you can't give a precise number for how much the tax will be, since you can't give a precise number on how many units they will sell and at what price, at least not over a multi-year span. Every business in the world makes multiple projections based on good and bad conditions, this is just normal planning.  So your objection about not having an exact number seems a bit overblown.

    However, your general point is valid. There's no reason they can't pass the tax along to the customer, adding it into the price of the device. They're probably adding politics into their press release, rather than keeping it all business.

    •  Correct (0+ / 0-)

      i know, but throwing around vague numbers is bogus.

      yes, this is being politicized as usual... easy to assume Limpbaugh, O'lie-ly and the rest will be all over this like a bad suit

      "A civilization which does not provide young people with a way to earn a living is pretty poor". Eleanor Roosevelt

      by Superpole on Thu Aug 02, 2012 at 06:20:43 AM PDT

      [ Parent ]

  •  Former Cook design engineer (15+ / 0-)

    I worked for Cook Medical a number of years ago and I know the profit margins most of their (and other manufacturers') devices make. I also understand the $ in R&D and the time to market. I also know how much they spend in advertising to the docs and "classes" they sponsor. Nothing new there goes out the door for under a 50% margin, most are over 100%. Old "commodity" type products with market competition are usually bundled and sold to hospital groups have lower margins but these are products that have up to 20 years in the pipeline and all manufacturing costs are down to labor and materials only. Cook was in Australia and Denmark 20+ years ago and Ireland 10+ years ago. This tax is not what caused the move to global manufacturing. Cook has always been a privately held corporation so their numbers come with an automatic BS factor but I can honestly tell you that no one cared how much they made until they were almost bought out by Guidant in the 90's. When the "pro" bean counters came in and started looking at things the corporate culture changed and $$ became a driving factor. Saying it will cost them $20 to 30 million would assume a sales of $1.3 billion (tax is based on sales not profits)from US sites....I really don't think that sales number is correct, BTW. Take a low ball margin of 30% (Medtronic is about 40+%) and you get a profit of $390 million.....and from that you can't afford $20 to $30 million to plow back into the very plan that is increasing the insured based thereby likely increasing your sales thru treating more people? That will mean a low ball PROFIT of $360 million for a privately held corporation.....and you can't afford a few $5 million buildings and a little higher payroll....that will generate new sales and new profits? WTF am I missing?

    You can't fix stupid or vindictive....

    by w7zard on Thu Aug 02, 2012 at 06:27:02 AM PDT

    •  Wow... many thanks (2+ / 0-)
      Recommended by:
      luckylizard, PeterHug

      for your take w7zard... this is the kind of input I was hoping to get here... I've got a near-RWNJ relative who sent me the article this morn... with the "See!!! Obama is killing job growth!" hysteria...

      this is my beef with many of our wonderful corporations.. they're not happy unless they make 100% profit.

      I assume their factories are non-union? ar you familiar with Zimmer in IN?

      "A civilization which does not provide young people with a way to earn a living is pretty poor". Eleanor Roosevelt

      by Superpole on Thu Aug 02, 2012 at 06:35:58 AM PDT

      [ Parent ]

  •  As a CPA and businessman, this is horseshit (8+ / 0-)

    First, they certainly will be able to pass on some of the tax to the customer. This is especially true as the tax is on medical device sales, so all companies in this industry are subject to it, whether they are domestic or international.

    Second, let's do the math. they say they were going to build 5 new plants.  Okay, let's look at this. They just spent $30M to renovate a plant. I'm going to throw out some assumptions here, admittedly, but I think they are pretty realistic. To spend $30M on a plant, in this industry, with a likely cost of capital around 6%, you'd probably want at least a 8% return / 3 year payback on the $30M, so this is about $36M of profit you'd have to generate over those 3 years, or $12M per year. Now, their gross margin is about 30%, throw in another 5% for incremental Selling/General/Admin expense, tax effect, this ultimately equates to about $24M of incremental sales per year that the converted plant has to generate to pay for itself.

    Since they did this project, they obviously thought they could achieve these sales. Even with the 2.3% tax, and even if they couldn't pass it on, all it does is push out the payback another year at most to 4 years. And, if they were already going to do these 5 other plants, there's no way in hell that the 2.3% tax makes it unprofitable to build those plants.

    It's completely bogus

    Liberalism is trust of the people tempered by prudence. Conservatism is distrust of the people tempered by fear. ~William E. Gladstone, 1866

    by absdoggy on Thu Aug 02, 2012 at 06:39:44 AM PDT

    •  exactly (2+ / 0-)
      Recommended by:
      Hoosier Al, Sylv
      all companies in this industry are subject to it, whether they are domestic or international.
      More importantly, the tax applies to medical devices sold domestically (be they manufactured domestically or imported from abroad) and the tax does not apply to devices made in the USA and exported internationally. So the tax on medical devices does not have a damn thing to do with this company's outsourcing.

      Democratic Governors Association on: Mitt Romney's economic plan

      by distraught on Thu Aug 02, 2012 at 07:09:58 AM PDT

      [ Parent ]

      •  Those lying liars! (4+ / 0-)

        Just looked it up to verify that, yes, the tax applies to products sold in the US regardless of their manufacturing origin and devices sold out of country are exempt.

        The thinking behind this is that there will be an increased demand and market for devices because more people will be in the medical system, just like the prediction of a doctor shortage, so that the tax will be swallowed up by increased revenue and profits.

        BTW, the first sentence in the diary could be changed to better reflect that.

    •  Nicely Done (0+ / 0-)

      thanks for that concise analysis...

      there's obv more than meets the eye here..

      I'd like to know what incentives Ireland is offering to get Cook to exapnd their business there... want to bet it's signifcant?

      so they come up with this BULLcrap excuse as a smokescreen/effort to deflect they're going to create more jobs in IRELAND than the U.S.... bcause the Irish gov't is kissing their ass more to their liking than here.

      weak, very weak

      "A civilization which does not provide young people with a way to earn a living is pretty poor". Eleanor Roosevelt

      by Superpole on Thu Aug 02, 2012 at 10:13:26 AM PDT

      [ Parent ]

  •  Tax is on imported devices also..... (3+ / 0-)
    Recommended by:
    Superpole, icemilkcoffee, PeterHug

    Their argument is now complete BS, as is Stryker's layoffs "due to the tax" as well. Turns out the tax is on ANY device sold in the US whether it is made here or outside.  Here is a link to a great summary of the tax:

    "Despite claims to the contrary, the excise tax creates no incentive whatever for medical device manufacturers to move production overseas.  The tax applies to imported as well as domestically produced devices.  Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers."

    So if they are simply looking to sell into other markets they COULD expand here, create jobs and export TAX FREE to the rest of the world.

    You can't fix stupid or vindictive....

    by w7zard on Thu Aug 02, 2012 at 09:37:41 AM PDT

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