Medical Device Tax: Will It (N)Ever Be Repealed?
By Jim Pomager, Executive Editor
Despite finding its way into countless proposed funding bills during the 16-day-long government shutdown, repeal of the medical device excise tax ultimately failed to make the final cut. The federal government is back in business, the budget and debt-ceiling deadlines (and any leverage they provide) have been postponed… and the much-despised levy is still alive and kicking.
Disheartening as it was that the device tax didn’t meet its end along with the shutdown, there were reasons for optimism in the days that immediately followed. For one, the White House’s position on the device tax repeal seemed to have softened some. Whereas President Obama had long maintained he would veto any bill that included a repeal, as the deadline for raising the debt ceiling neared and the budget stalemate dragged on, he indicated he might be open to the possibility of changing the 2.3 percent tax on medical device sales.
Meanwhile, Congressional support for repeal continued to grow. According to a recent Boston Herald opinion piece by Sally Pipes of the think-tank Pacific Research Institute, 266 members (61%) of the House of Republicans — including 40 Democrats — have signed on to legislation that would repeal the tax. Support appears to be just as strong in the Senate, where earlier this year 79 members (79%), 34 of whom were Democrats, approved a nonbinding resolution to eliminate the levy. All of Washington seemed to be in agreement that open discussions regarding the repeal, and other aspects of the Affordable Care Act (ACA), would take place now that the pressure of approving a budget and raising the debt ceiling was relieved.
The industry was encouraged by the perceived progress. Earlier this week, AdvaMed President/CEO Stephen J. Ubl issued a statement expressing that while his organization was disappointed that the tax was not repealed, it remained undaunted. “We are heartened by the strong and growing bipartisan support for repeal of the medical device tax in both the House and Senate, and we appreciate the commitment from many members of Congress to keep this issue front and center during the budget debate moving forward,” Ubl said. “We are strongly committed to full repeal of this tax, and we will continue work to that end.”
Still, the notion of repeal is not without its critics outside the medical device community. In a recent New York Times article (“The Myth Of The Medical Device Tax”), op-ed contributor Topher Spiro of the Center for American Progress went so far as to suggest that talk of a repeal was a diversion from necessary medical device industry reforms. Specifically, he called out the industry for its lack of pricing transparency/competition, for a “conflict of interest” between device makers and physicians, and for investing far too little in R&D to begin with. The result, he suggested, is a country that spends billions more than it should on medical devices each year, yet is still bereft of truly advanced technology breakthroughs. “Instead of using its clout to lobby against the device tax — which helped foment opposition to the Affordable Care Act — the medical device industry needs to share the responsibility of lowering costs for patients, businesses, and taxpayers,” Spiro concluded.
Other prominent detractors insinuate that the industry is being greedy — that device companies are wildly profitable, and that repeal efforts are just an attempt to protect bloated profits. They say that Obamacare will serve up millions of new customers, more than offsetting any losses the tax will inflict. They contend with assertions that the tax will have a meaningful impact on manufacturers’ revenues, that industry jobs will be lost (eliminated or offshored), that R&D activities will diminish, or that business will be shuttered. They assert that the repeal support is nothing more than lawmakers succumbing to the pressure of powerful lobbyists, and that repeal of the device tax would open the floodgates to other industries calling for their taxes to be rescinded. They say that repeal is not in the best interest of the country.
While some of their claims may be legitimate (the medtech lobby has been influential — interest groups have contributed nearly $40 million in support of the tax to current members of Congress, according to nonpartisan research organization MapLight), others simply ignore blatant evidence that the tax is already hurting — and will continue to hurt — the industry. Many manufacturers have already started shedding employees or moving them offshore, cutting R&D spending, and reporting lower profits. Some estimate that the industry could lose close to 45,000 jobs and $3.7 billion in employee compensation.
And though the larger device makers may be able to weather the storm, some startups may not. Remember that the 2.3-percent tax is on gross sales, not profits. It’s not uncommon for a new device to require years of time and tens of millions in investment dollars to navigate the stormy seas of FDA regulatory approval. And it can take between $70 million and $100 million in total sales before small firms (fewer than 50 employees), which constitute 80 percent of all medtech companies, begin turning a profit. As a result, they’ll be paying the tax for years before making a red cent.
Which side will prevail? It’s still rather hard to say. There are reasons to believe a repeal or suspension of the tax is possible, but it’s no slam dunk, and it could take a good while longer. (Let’s all hope it’s settled — one way or the other — before the end of the year, lest it again become the center of controversy during another round of budget and debt ceiling squabbles.)
Everyone can agree on one thing: If the tax is ever to be repealed, a substitutionary source of revenue must first be found. The Affordable Care Act demands trillions of dollars in support, and if the medical device industry ends up shedding its $30 billion share, someone else will have to pick up the slack. Various suggestions have been proposed — cutting subsidies to the oil and gas industry, eliminating the production tax credit for wind energy, etc. — but each has its drawbacks. So until someone can come up with a credible replacement plan for the device tax, the industry will have to continue enduring it.
What are your opinions about the device tax repeal? Of its critics? How has your company or job been affected? Will repeal efforts ultimately be successful or not? Why? Please share your thoughts in the Comments section below.
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