UPDATED Nov. 5, 2014, with comment from AdvaMed.
The impact of the medical device tax is "relatively small" and will affect consumer prices more than the medtech industry, according to a report released this week by the non-partisan Congressional Research Service.
The tax will result in a drop in U.S. output and jobs for the medical device industry of only 0.2%, according to the Nov. 3 study, "The Medical Device Excise Tax: Economic Analysis," by CRS senior economic policy specialist Jane Gravelle and public finance analyst Sean Lowry.
"These small effects occur in part because the tax is small, in part because demand is estimated to be relatively insensitive to price, and in part because approximately half of production is exempt from the tax," they wrote. "With relatively small effects on the U.S. medical device industry, it is unlikely that there will be significant consequences for innovation and for small and mid-sized firms."
The medical device tax, a 2.3% excise tax on U.S. sales of prescribed medical devices, went into effect at the beginning of 2013. The IRS told MassDevice.com in July that it collected $1.4 billion last year in excise tax payments, less than half the expected $3.1 billion. The tax bureau is having big problems even figuring out who owes the tax, let alone collecting what it thinks is owed.
Excise taxes are usually enacted to discourage consumption (for example of cigarettes or alcohol) or for a benefit directly related to the tax (as with gasoline taxes used for highway improvements).
"These justifications do not apply, other than weakly, to the medical device case. The tax also imposes administrative and compliance costs that may be disproportionate to revenue," Gravelle and Lowry wrote. "Some parts of the provision of health care services are not facing new taxes. It is difficult to explain the rationale for the tax based on the benefit principle."
The cost of compliance is also higher for the medical device tax, relative to the amount of revenue it brings in, they wrote. Although compliance should be easier in some ways, according to the report, in other ways it’s more difficult.
"Because the tax is ad valorem (based on value) and some firms are vertically integrated (distribute as well as produce) or sell to related parties, those firms must construct a wholesale price, as that is the price on which the tax is levied. Most excise taxes are unit rather than ad valorem," according to the report. "In addition, although the medical devices tax falls on products already regulated and firms registered with the FDA (which can also share data with the IRS), there are exempt products. Aside from specific exempt products, a complication of the medical device tax is the retail exemption, which is open-ended and arguably unclear. This lack of clarity introduces a different type of complication compared to most other products subject to excise taxes."
Wanda Moebius, a spokeswoman for AdvaMed, told MassDevice.com via email this morning that there are several problems with the CRS report.
"While AdvaMed agrees with CRS that, from the point of view of traditional economic and tax theory, the medical device tax is ‘challenging to justify,’ the other conclusions in their report are not accurate," Moebius said. "The CRS paper argues that job loss due to the tax will be minimal, but their analysis is fundamentally flawed because it assumes that most of the cost of the tax will simply be passed on to customers. This analysis ignores the fact that medical devices and diagnostics are purchased primarily by large institutions such as hospitals, clinical labs, and physician practices, and in the highly competitive market of medical technology, such purchasers have the ability to refuse to accept price increases. In fact a recent study demonstrates that the 7 largest categories of implantable medical devices saw substantial declines – between 17% and 34% in average inflation-adjusted prices."