The medical device tax enacted as part of the Affordable Care Act won’t have the deleterious effects predicted by the medtech industry, according to the chief economist of a non-partisan think tank.
Medical device companies and their lobbyists have long claimed that the 2.3% tax on U.S. sales of prescribed medical devices will drive jobs overseas, increase prices and stifle medtech innovation.
But Kent Gardner, head of research and chief economist for the Center for Governmental Research, said the tax is unlikely to have any of those effects.
"The tax is unlikely to shift jobs overseas because it applies to all medical devices, regardless of place of origin," Gardner wrote in an op-ed in the Rochester Business Journal. "Companies will make the manufacturing decision based on the same criteria as before-cost and quality of labor and the local business climate."
As for the industry’s fears that the tax will raise prices that will then be passed on to consumers, Gardner argued that the structure of the market for medical devices makes predicting who will bear the brunt of the tax a murky task.
"Nor do I think that the tax will simply be shifted onto consumers. That would be true if competition ruled and consumers were paying a price that was close to the cost. When firms hold significant market power – as they do in this industry – the connection between cost and price has been weakened," he wrote. "Price is largely driven by demand factors, not cost: Monopolists already charge what the market will bear. Yes, some consumers will pay more. But in much of healthcare, the monopoly providers often confront powerful payers and pricing depends on that balance of power. It is unclear who will actually bear the burden of the tax."
Finally, Gardner argued, the claim that the medical device tax will stifle innovation flies in the face of economic reality.
"Will the industry invest less in innovation if it is less profitable? Economists generally believe that a firm’s competitive instincts are dulled when it is highly profitable. Innovation is risky. If a firm is generously rewarded already, why take on risk?" he wrote. "So I’d bet that the medical device tax won’t make much of a difference to producers’ level of innovation. The tax won’t bite hard enough to make these firms hungry.
"What we need is a more competitive medical device industry. This would reduce the cost of joint replacement, make the procedure more readily available to those of us who walk with pain, and slow health care inflation. And it could spur innovation in a newly vibrant market," Gardner added. "But unless these firms are caught fixing prices, there are no legal options to force them to be competitive. We do know that the Affordable Care Act, title notwithstanding, is going to significantly increase public spending on health care. A tax on medical devices may be a more acceptable way to pay the bill than many of the obvious alternatives."