Health Law Daily Wrap Up, MEDICAL DEVICES NEWS—ACA’s medical device tax could result in less innovation or fewer jobs: report, (Apr 10, 2013)

By Jay Nawrocki, MA

The medical device excise tax included in the Affordable Care Act (P.L. 111-148 and 111-152) (ACA) could stifle innovation, cost jobs and drive up costs, according to Kyle Pomerleau, an economist with the Tax Foundation, a nonprofit tax research group. The ACA enacted a 2.3 percent tax on the total sales of medical devices by medical device manufacturers. The Joint Committee on Taxation estimated that this tax would raise $3.2 billion each year of the next 10 years. On March 21, 2013, the Senate voted 79 to 20 to approve a non-binding budget amendment to repeal this tax.

What’s taxed. Taxable medical devices are “intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease in man or other animal…or intended to affect the structure or function of the body of man,” according to Annette B Smith in an article from the July 1, 2012 edition of The Tax Adviser. The tax was designed to capture windfall profits of medical device manufacturers. Exempted from taxation are devices generally purchased by the public such as eyeglasses, contact lenses and hearing aids. The IRS and the FDA have the ability to exempt other items as they see fit, according to Pomerleau. Also exempted from taxation are any devices sold and exported overseas.

Not likely to be passed on. While manufacturers will try to pass this tax on to consumers, one type of consumer—hospitals—is watching to make sure this does not occur. “One hospital supply association was recently quoted as saying it ‘will continue to monitor the device marketplace for evidence of cost shifting onto hospitals, and encourage our hospital partners not to enter into contracts that bill them for the device tax,’” reported Pomerleau. It is likely that hospitals will be able to thwart attempts to pass this tax on to them. The balance of power in negotiations is in favor of the hospitals, wrote Pomerleau, because of the high number of medical device manufacturers and the low number of hospitals. In addition, because most devices are paid by an insurer, hospital patients probably won’t even know that a tax has been paid.

Reduced innovation and employment. One of the main concerns is that the tax will reduce innovation by device manufacturers because instead of spending money developing new or improving existing devices, manufacturers will have to spend that money on paying the tax. Pomerleau provides an example from Henry I. Miller of the Hoover Institute who posited that a small device manufacturer with $2 million in sales would be responsible for $46,000 in new taxes. Miller’s example has the company making a $75,000 profit after accounting for expenses, but not including the medical device tax. To be able to maintain a profit, Miller and Pomerleau argue that manufacturers will curtail research and development. A separate analysis showed that firms might hire fewer employees in order to pay the tax. The analysis by Dianna and Harold Furchtgott-Roth showed that employment losses could total 45,000 positions nationwide as a result of the tax.

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