• The job-killing medical device tax

    For The Hill, Pete Kasperowicz reports:

    A bipartisan group of 180 House members — consisting of about 40 percent of the House — has reintroduced a bill to end the 2.3 percent tax on medical devices that was imposed under the 2010 healthcare law known as Obamacare.

    That tax took effect at the start of 2013, and is expected to raise a few billion dollars a year in tax receipts for the government, and $30 billion over ten years. But opponents of the tax say it will hinder innovation and job creation in the medical device industry.

    “Placing a new tax on the backs of U.S. medical innovators and entrepreneurs who employ more than 400,000 Americans is not a prescription for economic growth or job creation,” said Rep. Erik Paulsen (R-Minn.), who sponsored the bill. “In fact, companies have already laid off thousands of employees as a result of this onerous new tax, and more jobs will be lost now that this tax is in effect.

    “It’s not only costing our country jobs and deterring innovation, but more importantly, it will reduce patient access to cutting edge medical products and treatments that save lives.”

    Here are some things to consider:

    1. One can always make the argument, about any sector, that the level of taxation or subsidization — no matter what that level is — is harming jobs and innovation in that sector. More money in the sector means, in general, more activity in that sector, more stuff, more jobs. It also, means less elsewhere.
    2. One can ponder what the “right” level of taxation is for the medical device industry. Given point 1, it’s not self-evident zero is right.
    3. One can be confident that the medical device industry, like just about every other, is lobbying hard for tax relief.
    4. One can be confident that the medical device industry will benefit tremendously from the large increase in the number of insured individuals to begin in 2014.
    5. One can speculate that there might be economies of scale in the medical device industry. If so, it stands to do very well come 2014. The government may have handed it a huge gift. (“You didn’t build that.”) I haven’t seen any unbiased running of the numbers, but maybe a 2.3% tax is a bargain.
    6. It may be that the medical device industry won’t ultimately pay the full tax any more than private insurers will pay the full Cadillac tax. Some might trickle down to premiums or offsets in quality. (Quality offsets aren’t necessarily bad. It is possible for products to be of too high quality, for technology to be too advanced. This is actually a problem in health care in general, and perhaps in the medical device sector in particular.)
    7. There are probably medical devices that most of us would agree should be taxed more. They’re overused or don’t provide much benefit. A flat, 2.3% tax is a crude way to address this issue. One would prefer to target some of the overused/low benefit stuff. But that would be picking winners and losers. Imagine the political fight. It’s impossible, but that doesn’t mean it’s wrong.

    I don’t really have a strong conclusion to make here. I just think there’s a lot more that needs to be brought into the discussion than we’ll ever hear from members of the House.


    • Given #1, it does seem self-evident that the right tax is zero. Otherwise you get underinvestment in medical devices. You may think there’s currently overinvestment. I think there’s overinvestment in Louis Vuitton handbags. But then the correct remedy is not a tax but addressing the underlying causes of the price exceeding the value you believe is warranted. That may be scaling back IP protection.

      Suppose the optimal solution is unavailable. Then the next best thing would be a tax on all goods that would’ve been affected by the optimal solution or as many as possible. In this case, maybe a tax on all goods under patent. It’s an extremely blunt measure but it’d be better than the medical device tax.

    • -This is a 2.3 percent tax on gross sales, right? If gross sales are $10, and profits are 10% or $1, then a 2.3 percent tax on gross sales wipes out roughly a quarter of the firm’s profits. For early stage companies with sales but with current operating losses, or negligible profits this could easily mean either paying taxes on losses or imposing losses on break-even revenues.

      It’s also worth noting that profit realization is not evenly distributed over the product cycle – there are often many lean years or outright losses despite healthy or growing gross sales figures while device companies invest in scaling up production, etc – and forcing early stage companies to pay 2.3 percent of gross sales during the early stages of their product cycles could have a much more dramatic effect on the sector than most people would expect – “Hey – the sector is very profitable and it’s only 2.3 percent, so what’s the big deal?”

      My prediction is that the magnitude of the effects at the margin – ranging from whether or not companies can raise sufficient capital to bring a given new device to to market to where they decided to make the said devices will be far more significant than one might guess just by looking at the number 2.3 percent. Seems like a pretty significant set of “unforseen consequences” bugs that could be alleviated with better policy design to me, but I suspect that there are quite a few people who see that as a feature.

      I agree that it warrants quite a bit more discussion, and if the tax isn’t modified I suspect that the consequences of the tax will catalyze quite a bit of dialogue.

      • I always reference below linked Bloomberg Editors statement on the tax. The quote I cite, if valid, says something about who pays it. No doubt, some mom and pop shops may get skinned, but not the bulk of those in the x-hairs.

        “The industry’s last refuge is a claim that the tax will hurt small businesses. On close examination, this doesn’t ring true, either. A handful of large companies accounts for most of the industry’s revenue. The 10 largest medical device makers probably account for 86 percent of sales and therefore will pay 86 percent of the tax.”


        • I’m not convinced that it matters whether small or large companies are being hit. Profit margins might be wider but if they’re small its still the same impact. Likely it will be passed onto consumers who should become less price sensitive as a result of more costs being borne by the gov.

          • Just clarifying…yes the ultimate cost might not be borne by consumers if they’re paying less out of pocket, but it’s borne by the government. I think price signals are the most effective way of controlling costs and with dulled price signals, I think it’s fair to say that utilization of medical devices will grow (which isn’t necessarily a good thing — overuse of imaging for instance).

    • Austin,

      It doesn’t seem right to assume point 4 would be such a huge benefit.

      All the projections that I’ve read thus far, assume that most of the newly insured would be the young, healthier population. Whether through the Medicaid expansion or through the exchanges. I don’t know the data off the top of my head, but it stands to reason that utilization of medical devices by that group is pretty small.

      • As I work with many pharma and device companies, I second the view that they don’t believe #4 is true for the reasons cited by YF. They do acknowledge that there will be some increased demand due to expanded coverage but do not agree that it will compensate for the losses through increased taxes and other changes made by the ACA. This seems like a topic ripe for more research.