Repealing the Medical-Device Excise Tax: Taking the Next Steps
(A similar version of this Health Alert appeared at Forbes.)
Why does the medical-device excise tax still exist? This tax is a universally reviled Obamacare revenue-raiser. It levies a 2.3 percent excise tax on the sales of medical devices of all shapes and sizes — from the smallest artificial-heart valve to room-sized imaging machines. Outside liquor and tobacco sales, most Americans don’t see excise taxes, which are levied on gross sales, irrespective of a company’s profitability. Repealing the excise tax has wide bipartisan support in both chambers of Congress. Obamacare champions — including Representative Nancy Pelosi and Senator Al Franken, both of whom voted to impose the tax when they voted for Obamacare — have manned the ramparts for repeal. The tax was first levied in January 2013.
Hoping to see it repealed before the first dollar was collected, scholars produced impressive research in 2011 and 2012, anticipating significant job losses due to the tax’s effects on device-makers’ ability to compete. In 2011, Diana Furchtgott-Roth and Harold Furchtgott-Roth published a study concluding that the tax would cost 43,000 American jobs. Similarly, Michael Ramlet and Robert Book of the American Action Forum wrote an analysis in 2012, which predicted job losses of at least 14,500 and up to 47,100. In a report for the trade association AdvaMed, Ernst & Young concluded that the excise tax would add 29 percent of companies’ U.S. corporate income taxes. (At the time, I was Vice-President of research at AdvaMed.)
Devon Herrick of the National Center for Policy Analysis published research explaining that most medical-device firms in the U.S. are relatively small. 95 percent of U.S. headquartered firms have sales less than $100 million and focus on domestic rather than international sales. It is more difficult for these small companies to avoid that tax by focusing on exports. Herrick also concluded that the excise tax doubled the effective corporate tax burden. However, since the device tax took effect in 2013, there has been a dearth of new research confirming these effects. On the theory that the tax’s impact would first show up in U.S. versus international sales, I wrote an article in Forbes in September 2013 showing that U.S. sales were suffering versus international sales. Well, the tax has been in effect for over a year and a half now, and its negative effect on U.S. sales of medical devices appears to persist. As in my previous Forbes article, I focus my analysis on the largest manufacturers. Of the ten largest medical-device companies, as defined by the online trade publication Medical Device & Diagnostic Industry, it is possible to discover relevant information from eight of them. They all indicate that U.S. sales are flagging, relative to international markets.
- Johnson & Johnson’s medical device and diagnostic sales were down 1.5 percent in the U.S., versus up 1.8 percent internationally, in the first half of 2014.
- Siemens reported that healthcare orders were down in the Americas for the first nine months of 2014.
- General Electric reported that the U.S. healthcare market continues to be “challenging,” and sales shrank by 2 percent in the second quarter, versus up 2 percent in Europe.
- Medtronic’s U.S. sales for the 2014 fiscal year were up 1.7 percent, versus 5.9 percent internationally.
- For Baxter, U.S. sales of medical products were down 15 percent for the quarter ended June 2014 in the U.S., versus up 8 percent globally.
- Fresenius’ U.S. sales of dialysis products were down 1.2 percent in the first half of 2014, versus up 0.6 percent internationally.
- Philips’ report for the first half of 2014 states that: “comparable sales in Western Europe were flat and other mature geographies showed low single digit growth, while North America recorded a low single-digit decline.”
- Covidien does not clearly segment U.S. sales from international sales in its report. Nevertheless, during the nine months ending in June 2014, Covidien’s excise-tax liability was $47 million. For the same nine months ending in June 2013, it was only $30 million.
So, the business environment in the U.S. continues to deteriorate, versus international markets. And these are the largest, global medical-device manufacturers, which can more easily overcome U.S. weakness by beefing up international sales. Smaller, domestic competitors are surely struggling harder. And yet the medical-device excise
tax is still with us, skimming 2.3 percent off the top of every sale of a medical device in the U.S. — although almost everyone says they want to repeal it. What can be done to move the repeal along? I have two suggestions: First, new research is needed to confirm the job losses and other negative consequences anticipated in the previously published research. Second, the industry has recoiled from suggesting a “pay for” to replace the revenue lost to the government if the tax is repealed. Finding a “pay for” is an important step for legislative success. Time is not on the side of repeal. The longer the tax persists, the longer it is likely to continue. Protecting American jobs and medical innovation demands a new approach.
I know consultants for the medical device industry. They all say the money in the industry has really dried up. Quality initiatives have suffered as firms look for expenses to cut. Expansion plans have been put on hold. Internal initiatives have been scaled back or postponed. Of course, firms are doing their best to ship products out the door. From first glance, it appears like business as usual. But I’m hearing from people who provide services to the industry that it’s like pulling teeth to get anything done that requires money because money is in short supply. I cannot help but believe that R&D is suffering because firms are having to take a short term viewpoint compared to before the ACA.
It’s been said that health care differs from other economic activity because of information asymmetry. I don’t believe it’s all that unique in that regard. But one way health care does differ– at least for non-elective care– is that the person who consumes more is not generally regarded as better off.
A consumption tax on health-related products makes sense only if you believe that medical care is a sort of fixed natural resource, and that a rich person consuming a designer drug or state-of-the-art procedure somehow depletes the resources available to people who are less well off.
I’m thinking here of Reinhardt’s critique of the concept of efficient resource allocation, using supply/demand curves in a sort of static analysis that implies that only a fixed amount of a given product can ever be produced, or at least that increased production can only come with higher unit costs.
“including Representative Nancy Pelosi and Senator Al Franken, both of whom voted to impose the tax when they voted for Obamacare — have manned the ramparts for repeal.”
So, they were for it before they were against it?
This is what happens when you don’t read the (&)#$%!
law before you pass it.
Franken’s thought process while voting to impose the tax in Obamacare:
“It’s good enough, It’s smart enough, and doggone it, people like it.”
“Herrick also concluded that the excise tax doubled the effective corporate tax burden.”
How can the medical device tax not be repealed at this point, after all of the evidence showing blatant bureaucratic power at the expense of those who bear the tax burden.
Interesting how the tax is almost universally opposed, and yet we have to fight in order to get something like this repealed. Are we still in a democracy?
We’re still in a democracy. It’s just that the signal to noise ratio has collapsed to be nearly inaudible.
This is ironic because the more available medical technologies are, or the more incentive there is for innovation, the lower health care costs can go down.
You write in the third paragraph “device makers’ ability to compete” but nowhere in your paper or at that first link do I see it explained how that ability to compete is harmed?
Thank you for your question. I meant the competitiveness of the industry, not competition within the industry.
As the cost of medical devices increases versus substitutes, there will be reduced use of medical devices.
We certainly know that there would be an effect as additional cigarette taxes have had caused some reduction in the number of smokers. And when the price of gas increases we do see a reduction in demand. But with gas the price increase in on the order of 25% increase. Same with cigarettes; it takes a big increase to reduce demand.
Are you really suggesting that 2.3% price difference will make people decide to forgo treatment? They’ll accept a lower quality of life, and some medical devices really do make a difference in the quality of life, all for 2.3%?
I have to say another reason I’m skeptical is most people get health care through insurance from their employer. And as such they don’t really know or care about cost. As a matter of fact isn’t this kind of a contradiction? Isn’t one of the complaints about rising health care costs because employer plans are so good that costs don’t impact employees so they don’t hunt around for lower priced alternatives? So who is going to decide to forgo treatment for that 2.3% increase? The provider?
Hospitals. They launched a campaign last year to stop device-makers from passing on the tax!
I don’t see how it follows that hospitals launching a campaign to stop device-makers from passing on the tax will reduce the number of procedures being performed?
It would reduce the profitability of the device makers, which would lead them to reduce supplies.
I remember the joke about selling cars at a loss but making it up in volume but I’ve never heard that a lower profitability would lead a company to cut back production. Either way however you would have to be claiming that fewer procedures will be performed?
Since the tax is almost two years old, does the data show a reduction in procedures?
That is a very good question and to give a definitive answer would be a very big research project. We could definitely look at the DRGs and see what has been happening.
…nowhere in your paper …do I see it explained how that ability to compete is harmed?
When economists talk about competition, what they always mean is price competition. The medical device tax is a tax on gross sales. Thus, it effects firms with high margins far less than highly competitive firms with razor-thin margins. In that regard, the medical device tax discourages price competition.
Another perverse incentive is that the device tax speeds the incentive to move off-shore. Medical device firms were always under pressure to reduce costs. But the regulatory nature of medical device manufacturing is such that it is harder to off-shore production than, say, tennis shoes. The shock of having 2.3% of gross revenue tax (on top of a tax on profits) convinced many device manufacturers the need to off-shore was inevitable.
Update: Ten largest medical-device firms added 25,000 jobs in 2013 (http://tinyurl.com/pnrnrpk).
On the surface, it suggests that the headwinds are not as bad as initially thought.
However, we cannot say what the job growth would have been otherwise.