Research & Commentary: Medical Device Tax
The Patient Protection and Affordable Care Act (PPACA) was passed with the expressed intention of reducing the cost of health care while expanding coverage. But the law’s tax on medical devices actually does the opposite by increasing costs while reducing the availability of these products.
As of January 1, 2013, PPACA requires manufacturers to pay a 2.3 percent excise tax on the medical devices they produce, to help fund health care expansion. The tax is imposed on a wide variety of manufactured medical devices such as pacemakers but excludes products such as eyeglasses and hearing aids that are sold directly to consumers and not through their insurance at a hospital. PPACA gives the IRS and FDA the authority to set additional exemptions.
Proponents predicted the tax would raise approximately $3.2 billion each year on average for the next ten years and medical device companies would enjoy increased profits because of the expansion of health insurance. Critics of the new tax argue that, like all excise taxes, it increases the cost of medical devices and overall health care costs for consumers.
The tax also is likely to harm the medical device industry through cuts in employment, decreased product innovation, stunted competition, and an inordinate impact on smaller companies. In a recent study, Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute, and Harold Furchtgott-Roth, president of Furchtgott-Roth Economic Enterprises, estimate as many as 45,000 jobs could be lost completely or shipped overseas as a result of the tax.
Opponents of the medical device tax also criticize its lack of transparency. Since the cost of the tax is integrated into the price of a product, consumers are not made aware of the cost the tax adds to the product. This is true of most excise taxes but is an even greater problem in health care. Most consumers do not directly pay their health care costs, but are covered through an insurance company, so they do not see the real costs of providing care, which makes the medical device tax a kind of “phantom tax.”
The medical device tax is a poorly designed levy that will serve only to increase health care costs and kill product innovation while costing the nation thousands of jobs. The will to repeal this burdensome tax already exists—in March the U.S. Senate voted overwhelmingly (79–20) in a nonbinding budget resolution to repeal the tax.
The following documents provide additional information about the medical device tax.
Employment Effects of the New Excise Tax on the Medical Device Industry
Diana and Harold Furchtgott-Roth estimate in this study the potential effect of the device tax on employment in the medical device industry. The study finds the tax could reduce employment in the industry by cutting back on the demand for medical devices and by encouraging American firms to shift production overseas.
The ACA Medical Device Tax: Bad Policy in Need of Repeal
Tax Foundation economist Kyle Pomerleau examines the medical device tax in this Fiscal Fact. Pomerleau argues the tax is harmful and will create distortions in the medical device industry, likely leading to higher health care prices for consumers, lower employment, and less innovation. He also notes the tax is complex and creates additional compliance costs for firms. These consequences argue for the permanent repeal of the tax, he concludes.
Heartland Daily Podcast: The Harmful Effects of the Medical Device Tax
In this Heartland Daily Podcast, Steve Stanek interviews Kyle Pomerleau, an economist for the Tax Foundation’s Center for Federal Tax Policy, about PPACA’s medical device tax.
Analysis: Prominent Democrats Call for Medical Device Tax Repeal
Ryan Ellis, tax policy director at Americans for Tax Reform, argues in this Heartlander digital magazine article that the medical device tax should not be characterized as an excise tax but as a gross revenue tax. Ellis cautions this makes the tax even more burdensome on medical device manufacturers because even if a company loses money it still has to pay 2.3 percent of its revenues, thus imposing a tax of up to 50 percent on top of the regular income tax.
The Medical Device Tax Hurts Weak, Strong, Sick and Healthy
Writing in Real Clear Markets, Diana and Harold Furchtgott-Roth consider the medical device excise tax and argue it is especially harmful to companies that innovate.
Buyer’s Remorse over Medical Device Tax
Greg Sorensen, chief executive officer of Siemens Healthcare North America, writes in The Hill about the effect of the medical device tax on the health care industry, and calls for reform.
Broad Coalition Urges Congressional Leaders to Repeal Medical Device Tax
This article describes a letter to Congress sent by a broad coalition of medical technology companies and leading associations urging Congress to repeal the medical device tax, which they argue suppresses innovation and reduces patient care. “If this tax is not repealed, it will continue to force affected companies to consider cutting manufacturing operations, research and development, and employment levels to recoup the lost earnings due to the tax. It will also adversely impact patient access to new and innovative medical technologies,” the letter states.
Medical Device Makers Shift Excise Tax Cost to Hospitals
Accounting Today examines evidence suggesting some medical device manufacturers are shifting the burden of the medical device excise tax directly to U.S. hospitals and other health care providers.
The Economic Impact of the Medical Device Excise Tax
Writing for the American Action Forum, Michael Ramlet, Robert Book, and Han Zhonge estimate the full economic impact of the medical device tax on medical device industry employment, investigate the tax’s effect on startups and small businesses, and evaluate the implications for U.S. leadership in the medical device industry.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at http://news.heartland.org/health, The Heartland Institute’s website at www.heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
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