Is an Excise Tax on Medical Device Revenue Wise?

On June 7, thirty-seven House Democrats joined 233 Republicans in voting to repeal the excise tax on medical devices contained in the Affordable Care Act (ACA). Despite this bipartisan support, H.R. 436 is reportedly dead on arrival in the Senate and President Obama has vowed to veto it if it arrives on his desk.

The Purported Purpose of the Tax

The medical device excise tax is designed to raise $20 billion from medical device industry coffers by 2019, through a 2.3 percent tax that will be levied on the total revenues of medical device manufacturers starting in 2013.  The rationale behind the tax is that the increased pool of insured citizens created by the ACA will result in the use of more medical devices and a corresponding financial windfall for device manufacturers. Taxing this windfall was to assist the government in its promise to make the ACA revenue neutral.

 Industry Associations Weigh In

Under the ACA, the tax must be paid regardless of whether the medical device company generates a profit. Therefore, since the tax is on total sales, rather than profits, companies with the smallest margins, such as unprofitable start-ups, may be unfavorably impacted.

Based on this concern, the Medical Device Manufacturers Association (MDMA) has gone on record regarding the tax, stating on its website “because many companies will owe more from the tax than they actually generate from their operations, the result will be devastating to innovation, patient care, and job creation.”

In addition, with regard to the view that implementation of ACA will create a windfall for medical device manufacturers, the MDMA has further dissented, pointing out that “there is no data or studies that show the cost of the ‘innovation tax’ will be offset due to an increased pool of insured beneficiaries receiving treatment. In fact, since the majority of products impacted are used in acute care settings where there are legal obligations to treat a patient, the effect of expanded coverage is not likely to increase utilization.”

These dire industry predictions, coupled with ongoing high unemployment and slower than expected job creation in the private sector, has undoubtedly lead some Democrats in the House and Senate to reconsider their support of this provision of the ACA.

Why an Excise Tax Anyway?

By definition, an excise tax is a tax on the use or consumption of certain products. Excise taxes are sometimes included in the price of a product, such as motor fuels, cigarettes, and alcohol. Excise taxes may also be imposed on some activities, like gambling. Excise taxes are typically intended to curtail the use of a product or activity which is detrimental to an individual or society, hardly the case with life-saving medical devices.  As a result, since you would think the government would want to encourage medical device innovation, the implementation of an excise tax on the annual revenues of the medical device industry would seem counterproductive.

The Effect on Device Manufacturers

As Christopher Weaver reported in the Wall Street Journal (WSJ) on June 28, the tax has already begun to affect some manufacturers. According to Weaver, JP Morgan stock analyst Michael Weinstein in a note to investors stated “few companies will be able to pass all or even a portion of the tax onto hospitals or distributors, so a number of companies have started to put cost-cutting plans in place.” According to Weinstein, smaller companies will take the worst hits from the tax, which applies to sales rather than earnings. Weinstein estimates that small device makers could see earnings per share fall by 10 percent. The WSJ further reports that:

  • Medtronic Inc., the nation’s largest device maker, estimates the tax will cost it as much as $150 million in 2013, according to a Medtronic spokeswoman.
  • Stryker Corp. estimates that the $130 to $150 million it will owe from the tax in 2013 could consume one-third of its research and development budget.
  • Medical-supply firm Zimmer Holdings, hospital-bed maker Hill-Rom Holdings, and other device makers have also attributed planned layoffs to the tax.

 CEOs, Economists, and Industry Associations Debate

In an interview of Boston-based AbioMed’s CEO Michael Minogue by Nation Public Radio’s (NPR) Chris Arnold, Minogue states  “I don’t think taxing the innovators and taxing the group of companies that provide innovation for healthcare is a smart idea, but the biggest concern I have, and what’s unprecedented, is to tax companies that are not yet profitable, and in our industry where 70 percent of the companies are not yet profitable, this is gonna have detrimental effects in their job growth, in their survival.”

In the same NPR interview, however, Paul Van de Water, an economist with the Center on Budget and Policy Priorities, counters Minogue, stating his belief that medical device manufacturers will likely just pass the tax onto the purchasing hospitals.  David Nexon of the industry trade group AdvaMed, however, disagrees with Van de Water’s belief. Nexon stated to NPR his belief that passing the cost on to a “large, sophisticated buyer” like a hospital chain will result in push back and resistance to a price increase.

The Perogative Now Rests in the House of Lords

So there you have it.  The issues are briefed and the battle is joined.  The House has passed the repeal with significant bipartisan support considering it is an election year.  The ACA has been upheld by the U.S. Supreme Court. In anticipation of the 2013 tax, some manufacturers have already announced lay offs and reorganizations. However, nothing can happen in the Senate the rest of this year unless Democrats like Minnesota Senators Amy Klobuchar and Al Franken of Minnesota, a state with major medical device industries, can convince their majority leader to bring the bill to the floor.