The Affordable Care Act (ACA) has had many disruptive effects on both the health care industry and the economy as a whole. One area receiving less attention that is raising health care costs and costing jobs is the ACA tax on medical devices.
As of January 1, 2013, ACA requires manufacturers to pay a 2.3 percent excise tax on the medical devices they produce to help fund health care expansion. As part of ACA’s labyrinthine funding scheme, the government imposes the tax on a wide variety of manufactured medical devices, such as pacemakers, but it excludes products such as eyeglasses and hearing aids sold directly to consumers and not through their insurance at a hospital. The law gives the Internal Revenue Service (IRS) and the Food and Drug Administration the authority to establish additional exemptions.
ACA proponents predicted the tax would raise an average of $3.2 billion each year for the next ten years and medical device companies would enjoy increased profits because of the expansion of health insurance. Over its first year, however, the tax has underperformed, and the IRS has had problems implementing it. According to The Hill, the IRS has faced challenges in determining which medical device manufacturers were subject to the tax. Whereas the IRS estimated it would receive between 9,000 and 15,600 forms to pay the tax and take in $1.2 billion in the second and third quarters of 2013, the Treasury Inspector General for Tax Administration found the IRS received only 5,100 forms and total revenue of just $913.4 million.
Critics of the new tax argue that like all excise taxes, it increases the cost of medical devices and overall health care costs. A recent report from the Congressional Research Service found the tax is likely to affect medical device companies far less than it would consumers, who would bear the effect of the tax.
Although health care device manufacturers have not experienced the extreme revenue losses some critics expected, U.S. medical device sales have fallen significantly. According to the online trade publication Medical Device & Diagnostic Industry, of the ten largest medical-device companies, eight have experienced drops in U.S. sales while their international sales have increased. The tax has also cost jobs in the medical device industry. The trade organization AdvaMed states the tax has already prompted the elimination of 14,000 jobs and prevented the creation of an additional 19,000.
The medical device tax lacks transparency; consumers are not aware of the cost the tax adds to the product because providers integrate the cost into the product price. 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, because coverage often comes through an insurance company and they are thus unable to see the real costs of care, making the medical device tax a “phantom tax.”
The medical device tax is a poorly designed levy serving 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) for a nonbinding budget resolution to repeal the tax.
The following documents provide additional information about the medical device tax.
Medical-Device Excise Tax: The Case for Repeal Needs New Arguments
http://www.forbes.com/sites/theapothecary/2014/08/01/repealing-the-medical-device-excise-tax-next-steps/
John R. Graham of Forbes discusses the medical device tax, how it has fared in its first year, and how the arguments for and against it have changed.
Report: Medical Device Tax Missing Revenue Mark
http://thehill.com/policy/finance/215522-report-medical-device-tax-missing-revenue-mark
Peter Schroeder of The Hill examines the medical device tax and notes it is raising only three-quarters of the revenue originally expected, according to a new government report.
The Medical Device Excise Tax: Economic Analysis
http://heartland.org/policy-documents/medical-device-excise-tax-economic-analysis
The Congressional Research Service suggests the greatest impact of the medical device tax will be on consumer prices, not profits of medical device companies. The effect on the price of health care, however, will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.
Employment Effects of the New Excise Tax on the Medical Device Industry
http://heartland.org/policy-documents/employment-effects-new-excise-tax-medical-device-industry
Diana and Harold Furchtgott-Roth estimate the potential effect of the device tax on employment in the medical device industry. They find the tax could reduce employment in the industry by cutting back on the demand for medical devices and encouraging American firms to shift production overseas.
The ACA Medical Device Tax: Bad Policy In Need of Repeal
http://heartland.org/policy-documents/aca-medical-device-tax-bad-policy-need-repeal
Tax Foundation economist Kyle Pomerleau argues the medical device tax will distort the medical device industry, likely increasing health care prices for consumers, lowering employment, and reducing innovation. He also notes the tax is complex and creates additional compliance costs for firms. These consequences bolster the argument for the permanent repeal of the tax, he concludes.
Heartland Daily Podcast: The Harmful Effects of the Medical Device Tax
http://blog.heartland.org/2013/04/kyle-pomerleau-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 the harmful effects of ACA’s medical device tax.
Analysis: Prominent Democrats Call for Medical Device Tax Repeal
http://news.heartland.org/newspaper-article/2013/01/15/analysis-prominent-democrats-call-medical-device-tax-repeal
Ryan Ellis, tax policy director at Americans for Tax Reform, argues the medical device tax is not an excise tax but 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
http://www.realclearmarkets.com/articles/2013/04/16/the_medical_device_tax_hurts_weak_strong_sick_and_healthy_100263.html
Diana and Harold Furchtgott-Roth ague the medical device excise tax is especially harmful to companies that innovate.
Buyer’s Remorse over Medical Device Tax
http://thehill.com/blogs/congress-blog/healthcare/290337-buyers-remorese-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
http://www.medicaldevices.org/node/1039
This article describes a letter to Congress from 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
http://www.accountingtoday.com/news/Medical-Device-Makers-Shift-Excise-Tax-Cost-Hospitals-65455-1.html
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
http://heartland.org/policy-documents/economic-impact-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 effect of the tax 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 http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
