The Lame Duck Device Tax?

In a recent Health Affairs Blog post, I explored the types of changes that might be made to the Affordable Care Act (ACA) if and when Congress decides to revisit the law in a bipartisan manner. While that day is likely still some years away, Republican control of the Senate this year does raise the probability we’ll see action on some more central elements of President Obama’s signature domestic policy achievement. While there has been considerable scrutiny, and bipartisan concern, about the employer mandate and the manner in which full-time employees are calculated for purposes of compliance with the ACA, for example, there has arguably been no steadier drum beat for repeal of a section of the health care law than for the medical device tax. Senators Hatch, Coburn, and Burr, for example, in their influential repeal and replace proposal, would strike the medical device tax (along with others under the new law). Perhaps more telling, however, is the fact that 34 Democrats, including Senate leadership members Schumer, Durbin, Murray, Klobuchar, and Warren, cast a nonbinding vote to repeal the policy as recently as September 2014.

THE CASE FOR REPEAL

What’s at the heart of this bipartisan consternation about the tax? There are others, such as those on pharmaceutical manufacturers and health plans, that have drawn considerable opposition, but not nearly to the degree as the one on medical devices. You could point to parochial interests, and you’d be right to some degree, but those exist for these other taxes and other controversial ACA policies. For starters, there has been an unusual raft of reports and surveys highlighting the impact of the medical device tax on the industry. For example, while the excise tax is 2.3 percent of U.S. revenues, an Ernst and Young analysis showed that it resulted in a 29 percent increase in federal income tax liability for manufacturers in 2013. In addition, industry surveys have shown that in addition to the loss of jobs, perhaps the most onerous byproduct of the device tax has been cuts to research and development (R&D) budgets. Surveys have consistently shown that approximately half of medical device innovators cut R&D budgets to address the tax by approximately 18 percent. A recently circulated Congressional Research Service report also noted challenges with the medical device tax, noting, “Viewed from the perspective of traditional economic and tax theory, … the tax is challenging to justify. … [It] imposes administrative and compliance costs that may be disproportionate to revenue.”

THE STAY-THE-COURSE CAMP

Defenders of the tax point to the fact that the industry will collect new profits due to the increased number of patients with health insurance under the ACA. It’s this coverage expansion that’s at the heart of every “deal” that kept most health care stakeholders in line supporting (or at least not vehemently opposing) the ACA when it passed. While it’s too early to verify or refute this claim, analysis of medical device companies operating in Massachusetts found no discernible increase in product utilization after implementation of near-universal health care there. Given the demographics of the estimated newly insured, many are expected to be younger, healthier individuals who are not high-volume users of medical devices. Device tax opponents also cite the muted Medicaid expansion and flawed Exchange rollout as factors inhibiting coverage and thus financial upside of the ACA for their industry. Perhaps more to the point, the stoutest defenders of the ACA – the Obama Administration and current Senate Majority Leader Harry Reid – likely believe that repealing the device tax will precipitate further unwinding of the carefully constructed balance that holds the law together. However, administrative changes to the law by the White House, including the two year delay of the employer mandate, cost more than the total costs to repeal the medical device tax. If the device industry wins reversal of its tax, what’s to stop insurers and other stakeholders from ramping up their calls for repeal of the elements of the ACA most costly to them? Consider also that many elements of the law opposed by some stakeholders are actually essential to others – the individual mandate comes to mind. At some points, key Democrats believe, they have to circle the wagons around the central components of the ACA or the entire legacy of the law will be in jeopardy.

WHAT’S NEXT

Fortunately or unfortunately, the essence of some Democrats’ defense of the device tax is more speculative than the fairly concrete financial impact it has on manufacturers. The domino theory may or may not prove true; meanwhile, manufacturers will be footing their tax bills. For that reason alone, it’s fair to expect that opponents of the policy may gain traction next year. While comprehensive and one-off assaults on the ACA can be expected early in the Congress, the Medicare “doc fix” legislation that comes due in March may be the first bona fide vehicle for device tax repeal. Budget reconciliation and other opportunities later in the year may also arise. Repeal is not a foregone conclusion, but the barometer for action is clearly rising.