Kill the medical device tax

Every once in a while a policy idea is sufficiently without merit that Republicans and Democrats in Congress unite in opposition.  The Affordable Care Act’s (ACA) medical device tax is one such policy lemon. Not only is the 2.3 percent tax on sales of medical devices terrible tax policy, it will hurt innovation and small businesses the most. 

As highlighted by a study from the American Action Forum, there are over thirteen thousand medical device companies in the U.S. with fewer than fifty employees.  Accordingly, small to medium size firms make up more than 91 percent of all U.S. device manufacturers. For these firms, research and development costs and time and expense of shepherding new devices through a lengthy approval process mean that it takes years before an innovating, entrepreneurial medical device company turns a profit.

This leads to the first policy flaw with the device tax.  These very companies spend years in development, sink costs into regulatory hurdles at the Food and Drug Administration, and when they finally begin to sell their lifesaving devices they are years away from profitability.  Despite this, the tax is slapped on to every sale.  The medical device tax is a sure-fire barrier to innovating lifesaving technologies.

In addition to curtailing medical innovation and economic growth, the tax will to some extent be passed along to purchasers of devices.  That is, the device tax will make more expensive exactly the kind of innovative, cost-saving health care that experts recognize is the most beneficial in the U.S. health care system.  

In short, bad incentives on both the innovation and purchase sides of the equation.

Two myths plague discussions of the device tax.  The first is that it is somehow a “benefit tax.”  Benefit taxation is a time-honored principal and one might plausibly make that case between, for example, the health insurance tax and expanded coverage under the ACA.  But the links between the ACA and device sales are far too tenuous to support such an argument.  For example, the device tax went into effect in January 2013, a full year before any increase in insurance coverage that would raise purchases was legislated to kick in.

The second myth is that repealing the device tax is a windfall to lobbyists or megabusinesses, or both.  Consider the response to the imposition of the device tax.  Many device manufacturers around the country will simply not invest in new technologies or they will delay plans to hire and expand their operations and some will even cut their employment.

In Michigan, Stryker Instruments announced more than 1,000 employees would be laid off. Other companies have announced they now can only afford to hire less than half the employees they originally planned to add to their roster. In Minnesota, the tax resulted in St. Jude Medical restructuring and cutting 300 jobs.  The detrimental impact of the medical device tax also extends beyond employment.

In Indiana, Cook Medical put on hold plans to build 5 new plants in the Mid-West due to the costs associated with this tax. 

The device tax is already harming employment, innovation and economic growth.  Worse yet, is that the tax is driving some companies to locate new production facilities overseas. Four companies have announced new facilities located outside the United States.

Repealing the device tax simply reverses these negative impacts.  It is a benefit to employees, investment and expansion.  Repeal’s greatest impact will be on the ability of small manufacturers and new startups to remain financially viable, while continuing to invest in new innovation.

Ultimately, the ACA has little to do with the medical device industry, and the device tax has little to do with the ACA beyond budgetary gimmicks. Divorcing these two largely unrelated issues is good for the economy and for innovation. The medical device tax is bad for manufactures, bad for consumers, and bad for our economy. It’s time for Congress to act and repeal the medical device tax.

Holtz-Eakin is the president of American Action Forum and former director of the Congressional Budget Office.