The medical device tax and why are medical devices causing the American government to shut down

October 16 ,2013 | By Anabela Farrica

Back in January 1st of this year, a 2.3% medical device excise tax imposed by the 2010 Patient Protection and Affordable Care Act (famously known as “Obamacare”) came into force. This tax is a part of a package of taxes implemented to finance the additional healthcare provided to those who will gain health coverage under the Affordable Care Act, starting in 2014. Every other industry in the healthcare business, from hospitals to pharmaceutical companies to insurance companies, is required to help fund Obamacare, with the main argument behind these fees being the fact that the industries that will profit the most from the increased number of consumers should also be the ones that help pay for these people’s access to medical care. This tax is imposed upon the sale of a taxable medical device by manufacturers and importers and it is expected to raise $29 billion over the next decade, significantly reducing the cost of the ACA and preventing this program to add up to the U.S. deficit. It is important to mention, however, that the law provides for a “retail exemption”, meaning that items typically purchased by the general public (e.g. contact lenses, eyeglasses) are exempt from the medical device excise tax.

While it is true that probably no industry wants to be taxed, you also wouldn’t probably expect the medical device excise tax to be one of the causes behind the current American government shutdown. But it is! And the reason the device tax is so controversial is complex.

For one, the medical devices industry is big, generating around $100 billion in revenue in the U.S. per year. According to studies funded by the industry, a 2.3% tax on sales could cost companies one fifth of their profits. This would in turn force the companies to lay off thousands of employees and to relocate their manufacturing facilities overseas. Furthermore, the industry argues such a cut in revenue would prevent the development of innovative technologies and result in higher financial burdens on the final consumer.

Defenders of the tax think differently. On the one hand, this tax is applied not only to products made in the U.S., but also to imported products, so American products will not be less attractive to buyers at all. Plus, America’s export industry will not be hurt, as the devices intended for oversea sales are also exempt from the tax. On the other hand, the industry will benefit from an increase in business because, with ACA, an additional 25 million people will have health-insurance coverage, i.e., there will be 25 million potential new costumers.

Perhaps thanks to the high lobbying potential of the industry, there has been bipartisan effort to stop the tax. Besides Republican representatives, several Democratic senators have publicly announced their discontentment regarding the device tax and maybe it’s not a coincidence that these senators hail from the states that are the home for large medical device industries (e.g. New York, Minnesota). Democrats favoring the repeal of the medical device tax depict it as a bad part of an otherwise perfectly good law. Much like the industry, arguments of job killing and innovation stifling support these Senators’ position.

Objectively, the burden of the tax is not heavy on the majority of companies. For large companies, which are expected to pay 85% of the abovementioned $100 billion, it is highly unlikely that the tax will result in a shedding of jobs. For small enterprises, 2.3% accounts for a very thin slice of what is already a small revenue number – but not so much so that it will threaten the survival of these start-up businesses. There doesn’t seem to be anything incredibly wrong about the structure of the tax either. It targets revenue, not profits – because profits can be hidden and many companies allegedly hide their profits in tax havens. But would it be a big deal if the tax were removed? Well, maybe. Since the financial viability of the ACA depends on the contribution of important revenue generators – medical devices industry included.

The Republican-controlled House has twice passed legislation to scrap the tax, whilst the White House in the past has said the president would not support such a measure. In an ultimate effort to repeal or delay the device tax, House Republicans precipitated the still ongoing American government shutdown and established such a repeal or delay as a condition to reopening the government.

Just today, news outlets reported that “Senate leaders hashed out a bipartisan deal that would raise the debt ceiling for a few months and finance the government through mid-January”. However, there’s no mention of a device tax repeal or delay in this agreement, suggesting that the tax’s main opponents may not have been successful. Either way, a lot is sure to happen before a consensus is reached.






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