Time to Repeal the Medical Device Tax

By Sally C. Pipes – Congress has struck a deal to re-open the government and raise the debt ceiling — at least temporarily.

Yet for some reason, lawmakers have excluded from the final agreement a policy prescription supported by Democrats and Republicans alike that was part of an earlier version of the deal — repeal of Obamacare’s medical-device tax.

Scrapping this tax should be Congress’s next priority. Not only will the levy raise the health costs borne by patients — it will also put tens of thousands of Americans out of work.

As of this year, medical-device manufacturers must pay a 2.3-percent tax on their sales. The tax is supposed to raise about $30 billion to help offset the trillion-dollar cost of the president’s health reform law.

The levy will effectively double the total tax bill paid by device firms. And because it’s assessed on a firm’s revenues — not its profits — companies will have to pay regardless of whether they actually make money.

That’s especially bad news for companies in their infancy. It takes $31 million to shepherd a low-risk medical device through the federal Food and Drug Administration’s regulatory process and into the marketplace. For higher-risk devices, the cost of approval more than triples.

Add the tax onto those substantial outlays, and start-ups will have a whole lot more trouble recouping their initial investments.

Start-ups are the lifeblood of the industry. Eighty percent of medical-device firms have fewer than 50 employees. Ninety-five percent post revenues of less than $100 million.

Firms are responding to the tax not by swallowing it — but by raising prices for patients. According to a survey conducted by Silicon Valley Bank, nearly one-third of start-up firms say that they will try to pass some or all of their new tax burden onto consumers.

Device companies are also putting off plans for growth — or worse, actively shrinking. The Silicon Valley Bank survey found that one-quarter of companies “will focus on expanding overseas instead of domestically” as a result of the tax. Others are planning on “reducing their workforce or foregoing new hires” and “shifting resources away from growing their business.”

Thanks to the tax, the industry could see as many as 45,000 job losses nationwide — over 10 percent of the sector’s current workforce. That translates to more than $3.7 billion in lost employee compensation. Fourteen states — including California, Florida, Illinois, Massachusetts, Minnesota, New York, New Jersey, Pennsylvania, and Texas — could lose more than 1,000 jobs each.

And those are just the direct casualties of the tax. The device industry supports another two million positions in other industries. Many of those could disappear if employment at device firms plummets.

Many of the job cuts could come from firms’ research divisions. The Silicon Valley Bank report finds that a number of companies are planning on “investing less in R&D for existing and new devices.”

My colleague at the Pacific Research Institute, economist Benjamin Zycher, estimates that the tax will cause the medical-device industry to cut investment in new products by 10 percent through the end of the decade. That’s equivalent to $2 billion less in investment per year.

The United States is — at least currently — the world leader in medical device technology. According to the federal Commerce Department, the U.S. medical technology sector’s value “exceeded $110 billion” last year and represented “about 38 percent of the total” worldwide.

But the device tax puts America’s perch at the top in jeopardy.

Given all the collateral damage exacted by the tax, it’s no wonder that both Republicans and Democrats have come out against it. Some 266 members of the House — including 40 Democrats — have signed onto legislation that would repeal the device levy. And earlier this year, 79 Senators — 34 of whom were Democrats — approved a non-binding resolution to scrap it.

Congress should repeal the medical-device tax before it does any more damage.

Sally Pipes is President, CEO, and Taube Fellow in Health Care Studies at the Pacific Research Institute. Her latest book is The Cure for Obamacare (Encounter 2013).

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