Report challenges medical device industry claims of economic damage

Many manufacturers of medical devices—including the sophisticated technology used to acquire medical images—claim that the 2.3% medical device tax imposed by the Affordable Care Act has caused widespread layoffs and reductions in research and development. An economic analysis from the Congressional Research Service issued earlier this month disputes those claims.

Legislation to repeal the unpopular tax—initiated in January 2013 and projected to produce $29 billion in revenue over ten years—has been introduced in Congress several times, most recently with the introduction of the Protect Medical Innovation Act of 2015 (H.R. 160), which aims to repeal the tax retroactively to 2013.

Although differential excise taxes that affect relatively small segments of an industry are considered inefficient, the medical device tax is one of a suite of taxes on segments of the healthcare industry seen as positioned to benefit from the expansion of health insurance under ACA, the report authors pointed out.

Including an excise tax on drug manufacturers and importers expected to generate revenue of $34.2 billion and another $101.7 billion tax on providers of “Cadillac” insurance policies, these taxes add up to a number that would be difficult to replace, making repeal of the device tax unlikely, they wrote.

In their analysis, the authors suggest that the tax is likely to be passed onto consumers rather than cut into profits and that half of total output is exempt due to carve-outs in the domestic market—eyeglasses and hearing aids—and the fact that exports are exempt.

The authors estimated that the effect on U.S. output and jobs would not exceed 0.2% because the tax is “small” and demand for medical devices is relatively inelastic and insensitive to price—partially because third parties (payors) not end users (patients) bear most of the cost.

Various scenarios were modeled in the report, in which consumers bore the burden of the tax through price pass-through and in which the companies absorbed the entire burden of the tax.

According to the models, the impact on corporate profits was less than 1% (0.9%) at most; potential output declines were a mere 1/100^th to 2/100^th of 1%; and job losses ranged from no effect to between 0.01% (47 workers) and 0.02% (1,200 workers) of industry jobs.

Track record to date

Nonetheless, the authors also reported that the tax has failed to generate revenue at the rate anticipated, citing a Treasury Inspector General for Tax Administration report that the tax produced $913.4 million for the quarters ending March 31 and June 30 2013, representing about three quarters (76.1%) of the projected revenue, a shortfall attributed to compliance issues.

According to the report, diagnostic imaging accounts for 8% of global medical device market, compared to 14% for in-vitro diagnostics; 13% for orthopedics; and 12% for cardiology. But the top five global medical device companies—Johnson and Johnson, GE Healthcare, Siemens, Medtronic, and Philips Healthcare— include four diagnostic imaging vendors, suggesting that some medical imaging industry players are shouldering a significant share of the tax burden.

In their analysis, the authors acknowledge that the tax is hard to justify when viewed from the perspective of traditional economic and tax theory, and that the additional administrative costs are disproportionate to revenue generated.

However, they suggest that most of the burden will fall on consumer prices, not on 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 (4%),” they conclude.