Who Will Pay the Bill After the Medical Device Tax Repeal?

The Patient Protection and Affordable Care Act (ACA) (P.L.  111-148) Medical Device Excise Tax has returned to headlines in light of renewed efforts to repeal the tax. The controversial ACA provision— a fundamental financial support of health reform—is projected to bring in $29 billion over the next 10 years. According to a New York Times article, the apparent legitimacy of the tax repeal effort is being given unusual bi-partisan support due to “liberal Democrats in states with large concentrations of device manufacturers.”  Amidst the reintroduction of legislation to repeal the tax—H.R. 160, the “Protect American Innovation Act”—opinions are divided as to who ultimately bears the cost of the 2.3 percent tax and whether the tax produces harm or supports positive industry reform.

Impact

The ACA provision imposes a 2.3 percent tax on the sale of medical devices. The tax is paid by manufacturers and importers. According to the New York Times, trade groups have brought strong opposition to the tax, indicating that it has already led to reduced spending and will lead to a loss of “195,000 jobs among manufacturers and suppliers and in the general economy over the next five years.” The Congressional Research Service (CRS) plainly disagrees with the industry’s analysis. The CRS estimated in a January 2015 report that the tax will have “fairly minor effects, with output and employment in the industry falling by no more than two-tenths of 1 percent.” Additionally, the CRS analysis concluded that most of the cost of the tax would fall on consumers, and not on the profits of medical device companies. The CRS also indicated that the subsequent effect on the price of healthcare would be negligible.

Response

Steven Ubl, chief executive of the Advanced Medical Technology Association (AdvaMed), and Gail Rodriguez, executive director of the Medical Imaging and Technology Alliance, responded critically towards the tax and the ACA in the form of a letter to the editor in the New York Times.  Primarily, Ubl and Rodriguez took issue with the assertion that, in the aggregate, pharmaceutical and medical device companies benefit from expanded insurance coverage under the ACA, regardless of the excise tax. The letter critiqued the argument in light of what the letter referred to as an “essentially nonexistent” growth in the demand for medical devices.  To support their position that the ACA tax is damaging the industry, UBL and Rodriguez pointed to a study conducted by AdvaMed—a medical device trade association. According to the study, which contradicted sharply with the CRS findings, the tax was responsible for 8,500 job losses and will lead to 20,500 less new jobs in the next five years. The study also indicated that 53 percent of companies participating in the survey indicated that research and development spending was cut as a result of the tax.

Future of the Tax

What the future holds for the ACA and its device tax remains unclear. Although opinions could hardly differ more significantly with respect to the tax’s actual effect, there are some facts that are less contested. For example, it is seldom disputed that the purpose of the tax was to generate revenue to support the expansive reforms of the ACA. The CRS indicates that although the tax is small, if it were repealed, “no revenue replacement has been proposed and it may be difficult to find.” Additionally, repeal efforts are raising other concerns. For example, both the CRS report and a New York Times opinion page have expressed concerns that success with medical device repeal may lead to industry challenges of other health care revenue provisions.   The worry is that without adequate revenue, already significant budget deficits will increase and struggling health care programs will be forced to face damaging cuts. The President and Congress will be asked to decide, in the near future, what should become of this particular tax. However, this issue once again poses the outstanding question about how we, as a country, should go about paying our health care bills.