The Curious Case of the Medical Device Tax

Some medical devices

The Disease Management Care Blog continues to welcome blog posts from outside authors. This is another one courtesy of Erik Tollefson, who works in the health policy field. He can be reached at erikDOTmDOTtollefsonATgmailDOTcom.

During the political maelstrom of the October government shutdown that enraged Americans and enraptured Tea Party alike, a curious proposal emerged as a possible eleventh-hour savior: a repeal of the medical device tax. 

The medical device tax, a substantial revenue source for ACA funding, was seen as a compelling political bargaining chip. Although not achieving a full “repeal” of the ACA, the vitiation of the tax would have given Republicans a symbolic victory (political cover) and the medical device industry a reprieve. Although the tax remained in force, it still serves as a potent symbol of how health care reform will need to align long-term financing mechanisms that also promote a more efficient health care system. 

A 2.3% excise tax on all medical devices was included in the ACA as a main financing stream for health care reform. Indeed, according to CBO estimates, the tax is estimated to bring in $29.1 billion in revenue from 2012-2022.  A repeal of the medical device tax would not cripple the ACA’s implementation; however, it would make it difficult to move forward, and perhaps more importantly, reopen the bill to legislative scrutiny (Note: President Obama’s announced  administrative fix for health insurance in the individual market assiduously avoided legislative action for similar reasons). 

Some supporters of the tax argue for the concept of “shared responsibility.” Building on the fiscal architecture of Massachusetts’ 2006 health reform legislation, proponents posited that stakeholders who potentially benefitted from health care reform should lend fiscal support.  The ACA followed a similar funding model: hospitals, insurers, and pharmaceutical companies all decided to participate; the medical device industry, although more obstinate, was ultimately written in the legislation.

More sophisticated repackaging of this argument has also emerged. Topher Spiro argued that the medical device tax served as a bulwark against the industry’s egregious pricing and anticompetitive practices. Although, to his credit, Spiro lays out more commonsense policies to increase transparency and address monopolistic concerns besides taxation, he ultimately adopts an odd “the ends justify the means” policy prescription.

Opponents of the medical device tax adopt a well-known line of reasoning: taxation on medical devices will hurt domestic innovation, eliminate jobs in research and development, and have a negative economic impact. This is textbook economic analysis. While some of these points are apposite, much like pharmaceutical companies, medical device companies could arguably make up lost revenue through discriminatory pricing abroad, although this may be (increasingly) difficult in areas such as “austere” Europe. 

Overall, one may be agnostic regarding the substantive points of both supporters and detractors and still be dismayed at the misalignment between the medical device tax and its intended purpose. Granted, medical device providers are leveraging the opportunity to lobby and maximize the industry’s interests in the ACA tumult. However, the tax is not ultimately intended to discourage purchase of medical devices, many of which have substantially improved quality of life for patients. Rather, it functions as a defacto “windfall” tax clawing back excess profits from an industry seen as anticompetitive and opaque with oligopolistic pricing power. 

This narrative works only so far: Medicare, a publicly funded entity, is one of the largest purchasers of medical devices.  However, Medicare is not able (or is politically prevented) from exercising greater pressure on medical device providers through conducting cost-effectiveness analysis or lowering payments on devices that have a suboptimal cost-quality profile. It is true that Medicare is developing bundled payments that will subsume the cost of the device as part of the total procedure; this move away from fee-for-service charges may reduce the “economic rents” (profits) of medical device firms over the long-term. Until then, however, the misalignment between financing mechanisms and policy incentives will likely continue, along with the distortions of second and third-best policies in an already bloated system. 

Medical image from Wikipedia