The medical device industry this week may have received the strongest argument yet for repealing the 2.3% medical device excise tax.
The U.S. Health & Human Services Dept. said just 107,000 Americans enrolled in new healthcare during October through federal and state exchanges established by the Affordable Care Act. An additional 396,000 Americans were determined eligible to receive coverage through Medicaid or the Children’s Health Insurance Program, HHS said.
The numbers are anemic by anyone’s standards, including the White House, which called the enrollment figures " lower than we hoped and we anticipated."
But the numbers are also low enough to stick a fork in the administration’s windfall argument for the medical device tax.
The Congressional Budget Office estimated that more than 7 million Americans will enroll in healthcare plans through state and federal exchanges during the enrollment period from October 2013 to March 31, 2014, with an additional 8 million receiving health insurance through Medicaid and CHIP. That works out to about 14 million previously uninsured people who will have health insurance in 2014. At the current rate of enrollment, that target would be missed by about 11 million.
Aside from the disastrous rollout of Healthcare.gov, which undoubtedly suppressed enrollment, the Obama administration says the numbers aren’t as bad as they appear when placed in context.
President Obama cited slow enrollment during the rollout of the healthcare reform law in Massachusetts, saying that uptake of the Commonwealth’s plan were "extremely slow, within a month only about a hundred people had signed up. But then, 2,000 had signed up, and then a few more thousand after that. And by the end of the year, 36,000 people had signed up."
But even at those rates, there would be a huge shortfall in enrollment under the ACA. To meet the CBO’s estimate, roughly 1.4 million Americans would have to sign up on the exchanges each month. And an additional 1.5 million would have to enroll through Medicaid and CHIP in order for the feds to meet their anticipated goals.
Here’s why that matters to medical device companies:
The medical device tax was created under the assumption that there would be a windfall of business for device companies from millions of newly insured Americans. That windfall, according to the framers of the ACA, would more than cover the 2.3% excise tax companies are now paying on all U.S. sales of prescribed medical devices.
Proponents of the tax, during the October brouhaha over the budget showdown in Washington, trumpeted a Wells Fargo study by analyst Larry Biegelson predicting that device companies would be able to offset the cost of the tax because of growth in medical procedures from the newly insured.
The device tax "won’t impose significant burdens on manufacturers," wrote Paul Van de Water, a senior fellow at the Center on Budget & Policy Priorities. "By expanding health coverage, health reform will raise demand for medical devices and boost the revenue of device manufacturers. A study by Wells Fargo Securities finds that health reform will increase device sales by 1.5% in 2014 and by 3.6% cumulatively through 2022. This increase, the study concludes, ‘will be sufficient to offset” the tax.’"
This point was echoed by Topher Spiro, vice president for health policy at the Center for American Progress, in a recent interview with Minnesota Public Radio. Spiro’s New York Times editorial, "The Myth of the Medical Device Tax," was widely cited by a number of publications.
But a deeper look at the Wells Fargo report shows that the assumptions of a windfall are based on very specific criteria that no longer hold true.
First, the study works under the assumption that there will be a major increase in the number of the newly insured during 2014. Biegelson used an estimate of 12 million newly insured as a baseline. If there aren’t 12 million newly insured, then the study’s conclusions are pretty much moot.
Second, the "increase" in business cited by the study, about 3.6% over 10 years, is most dramatic in 2014, when the industry is expected to get a 1.5% boost. That jump diminishes quickly in the following years and essentially zeros out by 2017.
As "the largest annual increase in coverage for the uninsured occurs in 2014, it is not surprising that we see the greatest impact on procedures in that year," Biegelson wrote.
The bottom line is that unless there’s some sort of Black Friday run on health insurance over the next few months, the predicted windfalls are illusory. Of course, there’s always hope that all 107,000 of the newly insured Americans will need knee implants.