When President Barack Obama signed the Patient Protection & Affordable Care Act into law back in 2010, he set the stage for a controversy within a low-profile industry that eventually drew some high-profile attention: A 2.3% tax on U.S. sales of medical devices.
In the months and years since then, Obamacare supporters and device makers have clashed over the effects of a tax on 1 of the healthiest industries in the U.S. Supporters of the ACA said the tax is only fair; after all, they reasoned, every healthcare stakeholder should pay their share for improving our moribund system. Some said medical device makers would pass the cost on to customers. And besides, others argued, the cost of the tax would surely be offset by the flood of newly uninsured, many of whom would undoubtedly need medical devices.
On the other hand, medtech countered that their base of addressable patients was already saturated; most of their customers are older and already have insurance. And the industry said the tax, structured as an excise tax like those levied on alcohol or tobacco sales, would have a disproportionate effect on the bottom line. To offset its costs, layoffs and reduced R&D expenditures would be required. And most of its customers are locked into contracts with set prices, making it unlikely that the medtech tax would be passed on.
With a year of the tax under our belts, it’s clear that neither side is entirely right. The woefully incompetent rollout of the healthcare insurance exchanges and the anemic enrollment that followed has made it clear that there will be no influx of new patients large enough to offset the tax. And it’s likewise clear that medical device companies’ customers – hospitals already under extreme pressure to reduce their own costs – are having no truck with a price increase of any kind.
But, as a MassDevice.com analysis of the 1st year of the tax shows, companies are paying much less than they or anyone else predicted. Our analysis is far from perfect, but it’s the only review we know of that’s based on the actual dollar amounts paid out by medtech companies. (MassDevice.com asked the IRS several times for information on the medtech tax, to no avail). In the end, we identified 64 companies that provided either exact figures on their medtech tax tabs, or described it as a percentage of total sales. Those 64 companies paid a collective $509.4 million toward healthcare reform in 2013.
That’s a big number, even it it’s not as large as expected. But the medtech industry’s argument against the tax still has some flaws. Moving manufacturing operations overseas was standard practice in every industry long before the medical device tax was a gleam in ACA architect Max Baucus‘ eye. It’s specious to blame the medical device tax for an offshoring trend that’s been half a century in the making.
Offshoring is 1 thing. Layoffs are another. It’s certain that at least some of the job cuts seen across the entire industry are the direct result of the tax (it’s also certain that some of them are the result of the recession and subsequent slow recovery and it’s downright impossible to parse the difference). And the industry is right that the tax must be made up for somehow, via a mix of layoffs and reduced R&D spends. That said, we believe that some estimates of the total nuber of jobs lost as a direct result of the tax have been inflated by the inclusion of jobs lost to a bad economy.
The medical device tax is a classic case of throwing good money after bad. The healthcare reform law it’s meant to support is a disaster; the industry it affects is an all-too-rare bright spot in our beleaguered economy and our deteriorating healthcare system; and our historic lead in medical technology innovation is at risk. We’ve said it before and it’s still true: The medical device tax is a bad idea.