Report Claims Impact of Device Tax is Likely Negligible

A new Congressional Research Service (CRS) report has concluded that Obamacare’s 2.3 percent medical device excise tax probably will affect the purchasers of medical supplies and devices—who may have to spend more on new technology—more than manufacturers’ bottom lines. But the report estimates the financial impact of the tax is likely to be negligible.

The Patient Protection and Affordable Care Act (ACA) established an excise tax on the sales of certain medical devices in the United States, whether manufactured domestically or imported. It’s the device industry’s contribution to funding the law’s coverage expansions. The tax, which took effect Jan. 1, 2013, is expected to produce net revenue of about $29 billion over a decade.

But opponents of the tax, including the Advanced Medical Technology Association (AdvaMed), congressional Republicans and some Democrats, contend the tax will have significant, negative consequences for the industry and cost America jobs.

CRS researchers estimate the tax would reduce output and employment in the industry by no more than 0.2 percent. This limited effect, according to the report, is due to the small tax rate, the exemption of about half of output, and the relatively insensitive demand for health services.

The analysis suggested that most of the tax will fall on consumer prices, not on device company profits. “With relatively small effects on the U.S. medical device industry, it is unlikely that there will be significant consequences for innovation and for small and mid-size firms,” the report said. “To the extent that the tax does fall on profits, economic theory indicates that there would be no effect on output or jobs. Stockholders, however, would lose money, but that loss would be reduced because of device exemptions and income tax offsets. The tax on U.S. producers would be $1.2 billion in 2013 if the entire tax fell on profits. The tax as a percentage of industry revenues would be 0.9 percent.”

A number of congressional bills have sought to repeal the tax. Some political observers believe the Republican-controlled Congress now will repeal the tax, though President Obama could overrule the repeal with a veto. Congressional Democrats in states with significant presence of device companies, such as Minnesota and Massachusetts, oppose the tax.

But the Obama administration and many other Democrats oppose repealing the tax because of concerns about how to replace the revenue to fund the health coverage expansions under the ACA. There also are worries that if the device industry succeeds in ending its contribution to the ACA’s funding, other healthcare stakeholders, including hospitals and health insurers, may seek similar repeals of their funding contributions.

The CRS report highlights the positive and negative sides of the tax, noting that the tax may mean marginally higher prices for new technologies. But it said fewer than 1,200 employees in the device industry would lose their jobs as a result.

AdvaMed spokeswoman Wanda Moebius cited several problems with the CRS report, telling MassDevice: “While AdvaMed agrees with CRS that, from the point of view of traditional economic and tax theory, the medical device tax is ‘challenging to justify,’ the other conclusions in their report are not accurate. The CRS paper argues that job loss due to the tax will be minimal, but their analysis is fundamentally flawed because it assumes that most of the cost of the tax will simply be passed on to customers. This analysis ignores the fact that medical devices and diagnostics are purchased primarily by large institutions such as hospitals, clinical labs, and physician practices, and in the highly competitive market of medical technology, such purchasers have the ability to refuse to accept price increases. In fact a recent study demonstrates that the 7 largest categories of implantable medical devices saw substantial declines – between 17 percent and 34 percent in average inflation-adjusted prices.”

Last year, the Healthcare Supply Chain Association publicized the names of medical supply and device manufacturers that told hospitals they planned to pass along the cost of the tax on the prices of the products they sell. Hospitals and group purchasing organizations have been concerned that devicemakers will pass along the cost of the tax to healthcare providers that buy their supplies.

The CRS report said the tax also may be passed through to federal healthcare programs through their purchasing of medical devices.