Tax cut in American Health Care Act already being used to shift medical-device industry jobs overseas.

AHCA May Help Kill U.S. Jobs

Republicans pushing new tax cuts in the American Health Care Act say the proposal is intended to boost revenues for medical technology companies, which would help them create American jobs. However, data from the past three years — as well as corporate financial filings — suggest that the windfall could instead effectively subsidize offshoring and layoffs in the industry.

Senate Republicans have been working behind closed doors on a new version of the AHCA, which is a top Trump administration priority. The House bill includes a full repeal of the medical-device tax first imposed by Obamacare in January 2013. The tax was suspended — with bipartisan support — three years later.

The tax is due to resume next year, however, and lawmakers in both parties say permanent repeal will help medical technology companies hire more workers. But some companies already appear to be using the suspension windfall to help pay for the steep, one-time severance costs of eliminating U.S. jobs as part of long-term cost-cutting or “restructuring.”

In public statements and corporate filings reviewed by TYT Politics, more than half a dozen major med tech companies — including some global leaders — show no sign of ramping up U.S. hiring. In fact, soon after the tax was suspended, some companies embarked on wholesale “restructuring” efforts. Some are pouring money into the creation of new jobs outside the U.S., including manufacturing jobs.

Most of the major med tech companies contacted by TYT Politics did not respond to questions. The two companies that did respond touted their recent investments.

“Rather than spending hundreds of thousands of dollars on the tax, which was based on sales rather than profits, we have substantially increased our investment in developing innovative devices that help children all over the world,” said a spokesperson for the Indiana pediatric device maker OrthoPediatrics.

A spokesperson for Medtronic, which promised to create local jobs in its home state after moving its legal headquarters to Ireland, told TYT Politics that, “More than 500 new jobs have been added in Minnesota since January 2015. While these numbers may fluctuate…the company is on track to meeting this commitment (creating 1,000 jobs in Minnesota) over a 5-year period.”

AdvaMed, the Advanced Medical Technology Association, initially predicted that the tax would kill 43,000 industry jobs, then estimated that it actually did kill almost 29,000 jobs, and now claims that permanent repeal will save or create 53,000 jobs. The industry advocacy group is run by former Bush Health and Human Services Chief of Staff Scott Whitaker and has been lobbying for the tax cut under the leadership of Chief Advocacy Officer J.C. Scott, a former congressional staffer who worked for Republican lawmakers including Deborah Pryce and Joe Scarborough.

Independent analyses have found no significant job losses from 2013 through 2015, and almost universally report that the industry grew during the three years the tax was implemented. In 2014, EP Vantage, which covers the med-tech industry, reported “stable” employment. Earlier this year, EP Vantage found “little impact from the medical device tax on employment in the sector.”

In 2015, the Congressional Research Service estimated minimal negative impacts on employment due to the medical device tax. Similar conclusions were reached the same year by Consumers Union and last year by Ernst & Young.

Some companies that eliminated jobs in anticipation of the tax ended up hiring again soon afterward. Minnesota-based St. Jude Medical, for instance, laid off six percent of its 16,000 workers before the tax hit. By the summer of 2014, St. Jude had expanded its workforce by seven percent, back to its 2012 levels.

In February 2014, OrthoPediatrics told The Daily Caller that it instituted a hiring freeze due to the medical-device tax. The company’s CEO, however, assured the Daily Caller that OrthoPediatrics was in no danger and was growing at a rate of 40% a year at the time. According to company documents, the OrthoPediatrics headcount grew from 46 employees in 2010 to 69 at the end of 2015.

(Last December, Reuters quoted the OrthoPediatrics CEO claiming that the suspension had let him expand his workforce. However, in the company’s IPO filing six months earlier, it listed just 58 employees, down from the 69 it reported at the end of 2015.)

Job Cuts Follow Suspension Of Device Tax

In an email, EP Vantage medtech reporter Elizabeth Cairns told TYT Politics, “There are so many other factors that can lead to a company expanding or reducing its headcount it is all but impossible to argue cause and effect.”

Industry executives, however, frequently do just that — blaming taxes for layoffs and crediting tax cuts for job creation. In a survey six months after the tax was gone, 69% of the med tech executives polled said they were likely to invest that extra money in U.S. jobs.

And some companies have stuck with changes they blamed on the tax. Georgia-based Theragenics said it would lay off 139 of its 534 workers and offshore some manufacturing, partially due to the tax. Purchased in 2013 by a private firm, Theragenics then decided to scale back its offshoring, but did end up creating 50 new jobs in Costa Rica, while eliminating 139 in Texas and 88 in Oregon.

Four days after the suspension took effect, Theragenics purchased a U.S.-Canadian company and said it would be manufacturing in Georgia.

But Theragenics appears to be one of a handful of exceptions. There are no signs the tax windfall is being put to wholesale job creation. Asked whether any companies have announced they actually will create new U.S. jobs if the tax is repealed, Cairns said, “Not to my knowledge. Companies tend to shy away from making definitive statements like this.”

Since winning the tax suspension in December 2015, several companies — including global giants Johnson & Johnson, Medtronic, and Stryker — have announced U.S. job cuts:

Jan. 19, 2016: New Jersey-based Johnson & Johnson unveiled a restructuring plan “including approximately $500 million of employee severance” to cut its medical-devices division workforce by as much as six percent, eliminating 3000 jobs worldwide.

June 2016: Boston Scientific announced its own “restructuring” and “targeted headcount reductions.”

October 2016: Baxter International of Illinois revealed it had allocated $144 million to pay for layoffs.

December 2016: Stryker shut a South Carolina factory supporting 88 full- and part-time jobs.

December 2016: Medtronic announced Twin Cities job cuts.

March 2017: Fifty Stryker layoffs were reported by local media in the company’s home state of Michigan.

February 2017: Indiana’s Zimmer Biomet said it will trim its U.S. workforce by up to one percent.

May 2017: Medtronic confirmed Memphis job cuts.

May 2017: Ohio-based Invacare announced announced 50 North American layoffs.

“It Will Get This Repeal”

Financial filings reveal other payroll changes that suggest the tax windfall is not fueling a boom in U.S. hiring. Invacare was cited by Whitaker in an op-ed last year as a company that would benefit from repeal. Its annual reports, however, show that the company went from employing 4700 people in 2015 to 4600 people last year, prior to last month’s additional 50 layoffs.

Similarly, Boston Scientific — an AdvaMed member and vocal opponent of the tax — said last March that the tax windfall would enable it to double the headcount of its collaboration with the Mayo Clinic. The company’s overall headcount did, in fact, rise last year — up to 27,000, from 25,000 in 2015.

However, the Boston Business Journal reported that the entire 2000-job increase was accounted for by overseas hiring, as Boston Scientific boosted its non-U.S. payroll from 12,000 to 14,000. A Boston Scientific spokesperson told the newspaper that the company’s addition of “several hundred” U.S. workers last year wasn’t reflected in its U.S. numbers because the company rounded down.

Despite the U.S. job cuts, many companies are expanding — primarily by acquiring other companies, or adding to their non-U.S. workforce. And business journalists have been chronicling the phenomenon.

“Bye bye device tax may not mean jobs galore,” read a March headline on MedCityNews.com. The Boston Business Journal ran a headline last month that said, “At Boston Scientific, device tax reprieve spurs mostly ex-U.S. job growth.”

“There’s always an argument for companies to shift their workforce from the US to a place where wages are lower, assuming they can get the same level of expertise,” Cairns wrote. “But the US government, particularly with a president with protectionist instincts, would presumably do what it can to avoid this — if repealing the tax would provide companies with the cash to relocate, the government might be expected to avoid repeal. That said, the current leadership is committed to tax reform, so maybe they would be willing to repeal the tax even if it did prompt medtech companies to cut their U.S. workforce.”

The industry is pushing back on recent suggestions from some Republicans that they might forego repealing the tax — in order to subsidize some Obamacare provisions they want to keep. The tax was projected to generate approximately $29 billion over ten years to subsidize health care.

Whitaker, the AdvaMed president, told MassDevice.com he is confident the tax will be repealed one way or another, thanks to Democratic support. A 2014 bill to repeal the tax was cosponsored by several Democrats: Sen. Richard Blumenthal (D-CT), Sen. Robert Casey (D-PA), Sen. Joe Donnelly (D-IN), Sen. Al Franken (D-MN), Sen. Amy Klobuchar (D-MN), and Sen. Jeanne Shaheen (D-NH). Other notable Democrats who have supported repeal include Sen. Elizabeth Warren (D-MA) and Georgia congressional candidate Jon Ossoff.

Even if repeal doesn’t get passed through the AHCA, Whitaker said, “The fact that we have such broad bipartisan support increases the likelihood that, regardless of the vehicle that Congress moves, it will get this repeal…I’ve been told by everybody, including leadership in the House and the Senate, one way or the other we’ll get it done this year.”

– A sampling of med-tech companies and their hiring patterns –

Johnson & Johnson

One of the world’s best-known brands, Johnson & Johnson has several divisions — the 60,000-employee medical-devices segment making up almost half of the company’s total headcount. When they announced — less than a month after the medical-device tax was suspended — that they would eliminate 3000 medical-device jobs worldwide, the company said they would save up to $1 billion as a result.

Its latest annual report did not mention new, domestic hiring as a result of the tax windfall, but instead said Johnson & Johnson is “seeking expansion opportunities in large, growing markets.”

Johnson & Johnson’s total headcount fell in the first year of its restructuring by 700 people. It’s not known how many of its U.S. layoffs were offset by expansion in other markets, but the report says that, “approximately 1500 positions have been eliminated,” suggesting another 1500 layoffs to come before this restructuring wraps up next year.

Medtronic

Like Stryker and Johnson & Johnson, Medtronic has a seat on the board of AdvaMed, which has endorsed the House AHCA. Like Stryker, Medtronic has also been lobbying for its passage — on its own and with the help of two lobbying firms.

Asked about the medical-device tax in 2015, Medtronic CEO Omar Ishrak told Fox Business News, “It’s well over $200 million in terms of yearly costs we have to pay out. That money we could have used for R&D or other purposes…We’d welcome its repeal, but you know that’s really not up to us.”

This is not Medtronic’s first time in a debate over taxes and jobs. In a 2014 mega-merger, Medtronic acquired Covidien and did a tax inversion — enabling it to avoid U.S. taxes on international profits — switching its legal home to Ireland. Ishrak told Fox Business News, “We’ll have more consolidation in manufacturing and so on. This is a process of cost reduction and optimization of back offices that can go on for several years and provide us with good earnings leverage.”

Minnesota politicians said they would hold Medtronic to its commitment to create 1000 jobs in the state. At the end of 2016, the Minneapolis Star Tribune reported that Medtronic said it had created 500 of those Minnesota jobs. In an email to TYT Politics, a Medtronic spokesperson wrote, “More than 500 new jobs have been added in Minnesota since January 2015. While these numbers may fluctuate…the company is on track to meeting this commitment (creating 1,000 jobs in Minnesota) over a 5-year period.”

Since the medical tax was suspended, Medtronic has spent millions opening a new Asia Pacific Regional Headquarters in Singapore, an office in Vietnam, a branch in Romania, and a $13 million manufacturing site in Shanghai.

Medtronic has also added workers to its non-U.S. payroll through acquisitions. One month after the tax was lifted, Medtronic paid an undisclosed amount to buy Italy’s Bellco, with 364 employees in Canada, France, Spain, Belgium, Brazil, and China, as well as a subsidiary in Italy.

In the same period, Medtronic has also poured millions of dollars into joint ventures created to fund startups outside the U.S., including MD Start in Europe, and the $60 million venture fund Medtronic Sequoia Capital in China. Medtronic Sequoia apparently has funneled undisclosed amounts to two Chinese manufacturing startups, Nanos Medical and — reportedly in partnership with an outsourcing firm — Forerunner Medical. The Medtronic spokesperson declined to quantify its overseas investments or identify additional ones.

A different pattern has emerged in the U.S., where Medtronic allegedly has laid off former Covidien workers and last year closed a Covidien facility in Massachusetts. In Minnesota last December, Medtronic reportedly let 70 people go, outsourcing some of their jobs to the Philippines. As its spinal division in Memphis was turning in its strongest quarter in seven years, Medtronic decided to lay off an undisclosed number of its 1300 employees there.

Asked for hiring numbers inside and outside the U.S., the spokesperson wrote, “Since January 2015 through [the] end of August 2016 our employee population in the U.S. increased by more than 1300 positions…I can also tell you that in FY16 we had more than 85,000 employees globally. FY17 we have more than 88,000 employees globally.”

The company did not break down how much U.S. headcount growth was organic or due to purchasing other companies. From January 2015 through August 2016, Medtronic bought more than half a dozen companies. In August 2016, for instance, Medtronic completed its acquisition of Heartware International, which had 625 employees worldwide. Most of the companies purchased, however — including CardioInsight Technologies, RF Surgical Systems, Medina Medical, Lazarus Effect, and Aptus Endosystems — were privately held and do not release employee data.

Medtronic’s non-U.S. growth has outpaced U.S. hiring since before the tax began, even before the massive Covidien deal, according to a company document listing regional employment levels. Prior to Covidien, Medtronic’s U.S. payroll increased from 26,071 in 2012 to 27,086 in 2015, a rise of 3.9%. Non-U.S. headcount grew from 16,400 to 19,282, increasing by 17.6%.

In a single year, fiscal year 2015, the Covidien deal increased the number of U.S. Medtronic jobs by 56.5%, up to 42,397. Covidien’s non-U.S. growth, however, meant that for the first time, Medtronic now had fewer workers inside the country than outside. Medtronic’s $50 billion purchase of Covidien swelled its non-U.S. headcount by 149.7%, up to 48,152.

In its 2015 Annual Report, Medtronic said that the Covidien restructuring would achieve “approximately $850 million in cost synergies,” and that, “Restructuring charges are expected to be primarily related to employee termination costs and costs related to manufacturing/building site closures.”

Last year’s annual report listed $213 million in “employee termination costs.”

Last month, according to a Seeking Alpha transcript of its quarterly earnings call, Ishrak told Wall Street analysts, “The integration of Covidien progressed as planned. We have now realized over $600 million in synergy savings.” He added that they “remain on track to deliver our goal of $850 million of total cost savings by the end of the next fiscal year.”

For the company’s first fiscal year without the tax, Ishrak said Medtronic had “$5.5 billion of free cash flow” and spent $1.5 billion on “strategic investments and five tuck-in acquisitions.” CFO Karen Parkhill added that $2.4 billion went to shareholders as dividends and the company used $3.1 billion on stock buybacks.

The call included references to “operations consolidation, in reducing our manufacturing footprint,” plans to “reduce our back office footprint,” and creating “more efficient shared services.” None of the executives on the call referred to specific hiring plans in Minnesota or elsewhere in the U.S.

Asked how many people Medtronic plans to hire in the U.S. in the event of permanent repeal, the spokesman wrote, “We currently have more than 2,000 openings,” but attributed them to “a variety of factors.”

Stryker

As TYT Politics previously reported, one of the most vocal proponents for repeal, Stryker Corporation, boasted of strong growth throughout the period it claimed it was hurt by the tax, spending billions to buy other companies, pay dividends to shareholders, and buy up shares of its own stock. Stryker’s headcount ballooned from 22,010 before the tax to more than 33,000 today.

In January 2016, the first month without the tax, Stryker CEO Kevin Lobo led a company earnings call in which he made no mention of using the windfall to hire more workers in America. “The two-year suspension of the med device tax provides us with the opportunity to bolster investments,” he said.

Stryker’s headcount increased that year, due not to new hiring, but to those investments bolstered by the tax suspension; specifically, acquisitions. “The number of employees increased from 2015 largely due to our Sage and Physio acquisitions,” its 2016 Annual Report says.

Buying Sage Products and Physio-Control International helped Stryker acquire new subsidiaries and employees in Australia, Austria, Belgium, Brazil, Canada, China, the Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, India, Italy, Japan, Lebanon, the Netherlands, Norway, Poland, Portugal, Russia, Singapore, South Africa, Spain, Switzerland, and the United Kingdom.

In a video produced last June by the Business Roundtable — a group of corporate CEOs — Lobo discussed the need for wholesale tax cuts. He said, “I have to compete with inverted companies or foreign companies to acquire medical technology companies. Most of the startups in med-tech are here in the United States. We need those funds [from tax cuts] to be able to buy these companies, because once we buy these startups, we invest in them. We increase the research and development, we increase the size of their plants. Those are all jobs in the United States…Frankly, all of the startups in med-tech come from the United States.”

But Stryker also spends millions buying companies that are not startups. In the year before his Business Roundtable video, Lobo’s company bought Canada’s CHG Hospital Beds, and Muka Metal of Turkey, another maker of hospital beds. As Lobo told CNBC, “Obviously transporting a bed from the United States costs a lot, so having local manufacturing really does help us.”

Under Lobo’s leadership, Stryker has also purchased Surpass Medical in Israel for $135 million, Trauson in China for $764 million, Germany’s Berchtold Holding — which had the South Carolina factory Stryker just closed — and, after the tax was suspended, Stanmore Implants in the UK.

Nor do tax rates seem to be the driving force behind Stryker’s investments outside the U.S. Three months after the U.S. medical-device tax was suspended, the Economic Times of India posted an interview with Lobo in which he complained about India’s tax rates, but also said that Stryker planned to expand there.

Lobo said Stryker was launching three products that year designed in India. He said the company’s Indian R&D tech center was, “designing fit-for-market products made for the India market…Over time, I’m hopeful that we can end up manufacturing some of these products. Today they’re being designed by our Indian designers, but they’re being manufactured outside the country.”

“We built that training center here, a tech center, and we look forward to continuing to grow and expand,” he said. India’s corporate tax rate at the time was 34.6%. Stryker’s effective U.S. tax rate was 14.3%.

Stryker’s 2016 Annual Report says its goals for 2017 include to “maintain our capital allocation strategy that prioritizes: (1) Acquisitions, (2) Dividends and (3) Share repurchases.” Speaking with Wall Street analysts this April, Lobo said, “We still have a lot of work to do in China.”

Zimmer Biomet

In its 2016 Annual Report, Zimmer Biomet says, “In 2017, we intend to invest the savings from the medical device excise tax moratorium into our business in areas such as R&D, sales force specialization and medical training and education.”

While some of those areas could involve U.S. job creation, Zimmer Biomet’s recent hiring pattern suggests its emphasis is outside the country. According to the Minneapolis City Pages, the Indiana-based company’s U.S. workforce grew 3.6% last year, from 8400 to 8700, while its non-U.S. workforce grew by 7.7%, double the U.S. rate, from 9100 to 9800.

Some of that overseas expansion came in Wales, where Zimmer Biomet last September added almost 40 jobs to the 800 it already employs there making knee and hip replacements.

Boston Scientific

Boston Scientific’s 2016 Annual Report lists $24 million in “termination benefits” related to the restructuring plan it launched six months after the tax was suspended. The company says it expects to spend as much as $56 million more on additional termination benefits in 2017 and 2018.

The company has said it would reap $75 million a year if the tax were eliminated. Its 2016 Annual Report says Boston Scientific will focus on “strengthening global infrastructure through evolving global real estate and workplaces, developing global commercial and technical competencies, [and] enhancing manufacturing and distribution expertise in certain regions…”

Invacare

Invacare has not disclosed how it distributed job cuts across its global workforce. But severance expenses included in its SEC filings offer some indication of where the cuts are coming.

In 2015, Invacare reported severance charges indicating layoffs were tilted toward North America:

North America/Home Medical Equipment: $1.07 million

Asia/Pacific: $26,000

Europe: $510,000

In 2016, the first year without the tax, Invacare increased severance payments in North America, and almost eliminated them elsewhere:

North America/HME: $1.86 million

Asia/Pacific: $100,000

Invacare’s annual contributions to its domestic retirement plan dropped from $2.7 million in 2014 to $2.36 million last year, also suggesting a shrinking domestic payroll.

In addition, a TYT Politics analysis of Invacare’s property leases and ownership shows that in the first year Whitaker said Invacare would benefit without the tax, Invacare invested in a dramatic expansion in its non-U.S. facilities. The company increased its square footage by more than 56,000 square feet while reducing its U.S. footprint by more than 11,000 square feet.

Ziehm Imaging

Ziehm Imaging President and CEO Nelson Mendes said last year that, “Full repeal of this burdensome tax will turn yesterday’s economic headwinds into tomorrow’s tailwinds, spurring sustained growth.”

Mendes also serves as the chairman of the Medical Imaging & Technology Alliance, which commissioned the survey of industry executives.

Despite Mendes’s reference to economic headwinds, Ziehm Imaging documents show the company grew from “more than 300” workers at the beginning of 2011, to “more than 400” workers in 2015. The privately held company does not say how much of that growth came in the U.S. but in the same time period expanded from six countries to nine countries worldwide, not counting Germany, where the company is based.

OrthoPediatrics

OrthoPediatrics gave TYT Politics the following statement:

“We were encouraged by the suspension of the Medical Device Excise Tax (MDET). OrthoPediatrics is a rapidly growing, late-stage startup that is still not profitable. Rather than spending hundreds of thousands of dollars on the tax, which was based on sales rather than profits, we have substantially increased our investment in developing innovative devices that help children all over the world. Since the suspension, we have accelerated new product development projects, hired additional engineers across all product lines, and focused on training new sales reps throughout the US. Since 2016, our R&D headcount has increased by over 30%, and we have continued to expand our sales reach throughout the US and abroad. Additionally, OrthoPediatrics’ commitment to providing world-class clinical education continues to grow; every year we are increasing the number of clinical training programs we provide to pediatric orthopedic surgeons. “

In an SEC filing, OrthoPediatrics said that at the end of 2015, its 69 full-time employees consisted of 14% in R&D and 49% in sales and marketing. The company’s June 2016 Initial Public Offering filing, to offer company shares to the public, said its 58 full-time employees were 19% in R&D and 38% in sales and marketing.

In response to specific questions about the company’s headcount, a spokesperson for OrthoPediatrics wrote that, “We have filed an S-1 with the SEC in preparation for an IPO. As such, there are certain elements about our company’s performance that I cannot disclose.”

Despite not being profitable, the company’s S-1 form says OrthoPediatrics intends to pay investors $3.4 million in dividends from the proceeds of its IPO.