Setting the Record Straight on the Medical Device Tax

October 4, 2013 at 1:39 pm

With some policymakers proposing repeal of health reform’s medical device tax as part of an effort to reopen the federal government, CBPP Senior Fellow Paul Van de Water responded to some claims about the tax in a Salon interview today.  Here’s an excerpt (click here for the full interview):

So what does this “device tax” tax, and why?

It’s a tax on a large number, but not all, medical devices. Things like cardiac stents, artificial hips, x-ray machines. The tax does not apply to medical devices that consumers generally buy themselves – contact lenses, or wheelchairs. It was one of a number of taxes that was included in the healthcare reform legislation to help pay for it. It’s been in place for nine months and we haven’t seen any significant consequences that I’ve heard about.

John Boehner accused Democrats of bringing us to the brink of a government shutdown partly “for the sake of raising taxes on seniors’ pacemakers and children’s hearing aids.” Does this tax cover those?

The tax does apply to pacemakers. It doesn’t apply to children’s hearing aides – those are things that consumers buy for themselves. So the speaker is partly right, and partly not.

So is the senior who has that pacemaker going to be negatively impacted by this tax?

Absolutely not. Elderly Americans are covered by Medicare. The price of the procedure is determined by the Medicare program, and the senior’s share of it isn’t going to go up as a result of this tax.

On the other side of the aisle, Elizabeth Warren wrote in an op-ed last year for a device industry website that this kind of tax “too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential.” She said it “also pushes companies of all sizes to cut back on research and development for life-saving products.“ What do you make of that argument?

I think that that argument really for the most part doesn’t hold water. There are a number of device manufacturing company owners who’ve actually spoken out and said a tax of this sort really isn’t likely to affect research and development. If you can produce a new pacemaker at roughly the same cost, which is a whole lot better, a 2.3% difference in the price isn’t going to shift the balance between whether or not you can sell the product, or whether or not you’re going to develop it.

Republicans have also said this tax will drive jobs overseas. Is that so?

No. Absolutely false. The tax does not apply to medical devices that are exported, and it does apply to medical devices that are imported. There’s no change in the relative positions of the US companies relative to foreign competitors.

How does that cost compare to the new business these companies are going to get under the ACA?

This tax is one of several that are being imposed on industries that are going to benefit from the new health reform legislation. There was a recent analysis by a Wells Fargo analyst who found that in 2014 that the demand for medical devices would go up by about 1.5 %, and by 2022 the cumulative increase would be about 3.5%

So why has this tax become such a target?

The medical device industry has a very energetic, very aggressive lobbying campaign. And in this particular case it’s proved to be very effective in convincing a lot of members of congress that it’s in their political interest to support repeal of the tax. The industry also has former members of Congress such as former Senator Evan Bayh arguing on their behalf, and that sort of thing makes a difference.

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Comments are listed in reverse chronological order.

  1. Mike #

    You overlook several important aspects.

    For one, the fact that a company or several companies see a bright side of the ACA (maybe if you sell trauma devices used in the ER for example) doesn’t invalidate the concerns of others that have to make large R&D investments and may be years from turning a profit, all the while paying this tax on their top line revenue even while they make no money.

    As your own example shows, patients who get pacemakers (and most other medical devices like stents, valves, joint replacements, etc….) are covered by medicare, or medicaid, which means they are almost all covered todady, and wont be adding more patients to insurance with the ACA because they are already covered – so the 2.3% tax is really just off the top with no “windfall” of new patients.

    It’s true the tax has been in effect for most of this year and if you were paying attention you would have seen the thousands of employees across many companies laid off over the last year or two

    Lastly on the overseas comment, yes, it doesn’t matter where the devices are made that are sold here, but companies are moving work overseas to offset, not avoid, to offset the tax. if you can reduce labor costs substantially on a product maybe you can counteract the 2.3% hit. This industry is now being to pushed to follow what others have done for a while, to save money and offshre.

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