Medical Device tax impact: negligible

screenshot_93The 2.3% medical device tax imposed by the Affordable Care Act in 2010 was one of a number of additional revenue-raising provisions to finance health reform. This tax, which took effect on January 2013, is projected to collect approximately $38 billion of excise tax revenues over the next 10 years, resulting in $29 billion of net revenues, after accounting for offsets from other taxes.

The major justification offered for the medical device tax is its revenue, which helps offset the cost of the ACA. Although the tax is relatively small, no revenue replacement has been proposed and it may be difficult to find. There is also a concern among some that eliminating the medical device tax would lead to proposals to eliminate similar fees and taxes on other industries, the sum of which, including the device tax, totals $165 billion over 10 years. The tax was justified partly because the medical device industry was among the commercial interests that stood to benefit from unanticipated profits as more individuals enroll in health care insurance, post-ACA.

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Opponents of the tax claim that the medical device tax could have significant, negative consequences for the U.S. medical device industry and on jobs. The estimates in this report suggest fairly minor effects, with output and employment in the industry falling by no more than two-tenths of 1%. This limited effect is due to the small tax rate, the exemption of approximately half of output, and the relatively insensitive demand for health services.

The analysis suggests that most of the tax will fall on consumer prices, and not on profits of medical device companies. The effect on the price of health care, however, will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.

Congressional Republicans are determined to repeal this tax and are virtually certain to succeed, thanks to strenuous lobbying and campaign contributions from the device industry.  There is no good reason to eliminate the tax. The Congressional Research Service estimated in a report this month that the tax will have “fairly minor effects” on the industry’s output and jobs (reducing them by a fraction of 1 percent) and a “negligible” effect on the price of health care.

Perhaps, to raise revenues, patients who chose to live unhealthy lifestyles should be forced to pay more in healthcare insurance premiums?  One thing is for certain pharma will continue to take heat for high medication costs even though Rx drugs are only 11% of every health care dollar spent.