Repeal the Medical Device Tax

Rarely is there bipartisan agreement that a tax cut won’t cost the federal government money. But, in the case of the medical device tax (a 2.3 percent tax on medical devices and products that was passed as part of the Affordable Care Act) this is true by definition because the tax is already suspended.

The tax applies to medical devices such as pacemakers, advanced imaging technology (Cat Scan, MRI and ultrasound equipment), artificial joints, surgical gloves, and dental instruments. Devices that the public generally buys for individual use, such as eyeglasses, hearing aids, and wheelchairs, were explicitly exempted from the tax.

The medical device tax was never an economically sound policy, which explains why both the Senate and House of Representatives have separately passed repeal legislation, and twice implemented a moratorium that suspended the tax. Passing a series of moratoriums is insufficient, however.

The optimal policy permanently repeals the medical device tax because the tax creates unnecessary economic inefficiencies and discourages the consumption of medical devices to the detriment of patients’ welfare and overall health care affordability.

Take imaging technologies as an example. Imaging technologies help physicians detect diseases in their earliest stages when they are most treatable. Clearly, policy should not discourage greater use of these crucial medical technologies nor increase their price. Yet, if the medical device tax were not suspended, then an additional $230,000 in costs would be imposed on an imaging device company with $10 million in revenues (the 2.3 percent medical device tax multiplied by the $10 million in gross revenues).

How the company will deal with these costs is unknown. Some of the costs may lead to higher medical equipment costs, harming patients’ welfare. Some may reduce the profitability of the company, possibly turning a profitable company into a money loser.

The only outcome that is not possible is that the tax does not distort the imaging technology market. Policies that lead to some combination of higher medical costs and less availability of medical technologies worsens the problems facing the U.S. health care system.

Empirical studies examining the medical device tax have differed regarding the exact magnitude of the tax’s negative economic impacts, but directionally all studies agree that the tax will adversely impact the medical device industry specifically, and the economy more broadly.

As the Joint Economic Committee documented, the medical device tax also violates the widely agreed upon principles of a sound tax system. For instance, the tax is designed to tax a subset of medical devices; therefore, by conception, the tax imposes distortions into the medical device market, and creates incentives for manufacturers to seek loopholes and exemptions to benefit their products at the expense of competitors.

Further, the tax will not impact manufacturers of the same device equally. Some manufacturers may be able to absorb the costs, or make up for lost revenues on one device by increasing prices on other devices. Other manufacturers may be unable to absorb these costs causing them to lose money.

Complying with the medical device tax is complex for many firms and the high compliance costs disproportionately harm smaller firms. The medical device tax is also hidden from the consumer who is generally unaware that this tax is priced into the costs of the product; has been applied inconsistently across products due to exemptions and short-term suspensions, which create difficulties for firms to plan and manage the tax; and, subjects some medical devices to double taxation.

The medical device tax also harms smaller start-up companies more than larger, more established, companies because start-up businesses typically have thinner profit margins. These losses threaten future innovations because a great deal of innovation in the medical device industry is created by small start-up businesses.

The medical device tax has an undeniably negative impact on the health care sector. The tax violates the commonly accepted principles of sound taxation and imposes unnecessary economic costs. Further, patient welfare is also negatively impacted. Whether through cost increases that make medical technologies less affordable, or by stifling innovations and new technologies that could improve patients’ quality of life, the medical device tax imposes adverse consequences on overall patient well-being

As a consequence, the right policy response is to permanently repeal the medical device tax. Toward this end, there is a current repeal bill that has been approved by the House of Representatives on July 24, 2018. While as of October 2018 it is unknown whether a repeal vote will take place in the Senate, based on the economic merits, it should. Eliminating the medical device tax will help encourage medical innovation and improve the quality of care provided by the U.S. health system.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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