The Medical Device Tax: A Vise On Innovation
Since the day of its passage in 2010, millions of Americans and hundreds of members of Congress have called for the repeal of the Patient Protect and Affordable Care Act (PPACA), more commonly referred to as the Affordable Care Act (ACA) or Obamacare. The House of Representatives has had 54 votes on bills that would have fully repealed, restructured broadly, or modified parts of Obamacare. Many of these bills received bi-partisan support; most have died in the Senate. One bill that is likely to pass in the Senate if it could get a vote would fully repeal the ACA’s 2.3 percent excise tax on medical device sales.
When President Obama was campaigning in 2008, he said he would not raise taxes on the middle class. But unfortunately for many Americans, there are several taxes in Obamacare that, according to Henry Blodget of Business Insider, are both “‘progressive’ (aimed at rich people) and ‘regressive’ (aimed at the middle class and poor people).” These taxes include a 3.8 percent tax on investment income for a single person’s adjusted gross income above $200,000 and $250,000 for joint filers; a 10 percent indoor tanning tax; a 40 percent tax on “Cadillac” health insurance plans that have premiums costing $10,200 for an individual or $27,500 for the family; the tax penalty for not purchasing health insurance; and the medical device tax.
The medical device tax will cost medical device companies approximately $30 billion over 10 years, according to the Congressional Budget Office. It is not a direct tax on American consumers, but they will pay for it through elevated costs for medical devices. As a result, provider and insurance costs will increase, as well as Medicaid and Medicare costs.
Consumers will also pay in terms of lost innovation. When a company is taxed, it faces a dilemma: pass along the costs to its customers or cut future investment, such as research and development and employees. Usually it’s a combination of bad choices.
Medical devices range from the lowly tongue depressor and plastic adhesive bandages to sophisticated CT scanning and MRI equipment; from diagnostics such as glucose test strips to life-changing hip and knee implants. In other words, a lot of things that help Americans live better and more productive lives.
The Food and Drug Administration uses the following definition for a medical device:
“an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is:
· recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them,
· intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or
· intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.”
Fortunately, there are some medical devices that are not subject to the tax. When Obamacare was being debated, there was a lot of criticism that the tax would reach such commonly-used items as eyeglasses and thermometers; it was dubbed the “Band-Aid” tax. As a result, Obamacare has specific exemptions for some medical devices, such as eyeglasses, contact lenses, and hearing aids. There is also an exemption for “any other device determined by the Secretary [of the Treasury] to be of a type which is generally purchased by the general public at retail for individuals…” Of course, whatever the secretary giveth, the secretary can take away. Nothing stops a future Treasury secretary from removing some retail medical device from the regulatory exemption list, especially if more money is needed to fund Obamacare.
Medical devices that are taxed include infusion pumps, heart valves, MRIs, pacemakers, stents, hip and knee implants, and dentures. The medical device excise tax is particularly damaging because it is on gross sales, so even if a company is losing money, it must pay the tax. This is of particular concern to a start-up medical device company that may not yet be making a profit.
AdvaMed, a trade association that represents medical device companies, undertook a survey of its membership in November 2013, approximately a year into the tax’s implementation. The association found the following:
· The tax has resulted in direct employment reductions of approximately 14,000 and the industry has forgone hiring 19,000 workers, for a total of 33,000 lost jobs. The indirect job loss is 132,000. Indirect jobs are those that rely on medical device companies for business, such as suppliers and vendors.
· About one-third (30.6 percent) of those surveyed said they had reduced research and development because of the tax.
· Almost 10 percent of those surveyed said they had either relocated manufacturing outside the U.S. or will expand manufacturing abroad rather than in the U.S.
· Three-quarters of respondents said they had taken one or more of these actions in response to the tax: deferred or canceled plans to open new facilities; reduced investment in start-up companies; found it more difficult to raise capital (among start-up companies); reduced or deferred increases in employment compensation.
In addition to being a job and innovation killer, the tax is also difficult to administer since it is not clear which devices get taxed. Since the tax began on January 1, 2013, manufacturers have been required to file a Form 720 quarterly, which is used for excise taxes.
An August 19, 2014 report by Treasury Department Inspector General for Tax Administration (TIGTA) J. Russell George found that medical device tax revenue has been lower than expected. The report stated, “While the IRS has taken steps to educate medical device manufacturers of the medical device excise tax during implementation, it faces challenges to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements.”
TIGTA said the IRS is attempting to develop a compliance strategy to ensure businesses are compliant with the tax but the IRS “cannot identify the population of device manufacturers registered with the Food and Drug Administration that are required to file a Form 720 and pay the excise tax.”
In addition, TIGTA found that processing controls do not ensure the accuracy of medical device excise tax figures on the Forms 720 and that the IRS “erroneously assessed 219 failure-to-deposit penalties totaling $706,753 against businesses filing a Form 720 …during a penalty relief period.” While the IRS had reversed 133 of the erroneous 219 assessments, the IG had to alert the IRS of the remaining 86 erroneous penalties. The IRS reversed the penalties and issued apology letters to the affected taxpayers.
As a result of the law’s complexity, only 5,107 tax returns were filed in the first two quarters of 2013 with a total revenue of $913 million. The IRS expected that 9,000 to 15,600 Forms 720 would be filed with a total revenue of $1.2 billion. That amounts to a 24 percent shortfall.
Senator Orrin Hatch (R-Utah), a leader in calling for the repeal of the medical device tax, said of the IG report, “Everything from this ill-conceived tax’s structure to its implementation has been a disaster. As I have said all along — the only real way to fix this tax is to repeal it.”
An October 11, 2013 Congressional Research Service (CRS) report also examined the medical device excise tax. CRS wrote, “The new Treasury regulations on the medical device excise tax, while providing some certainty with respect to what devices will be exempt from the tax, generally favor a more flexible approach to defining the scope of the central exemption to the tax. As a consequence, uncertainty remains as to which medical devices will be subject to the tax. Indeed, Treasury, in releasing the medical device excise tax regulations, notes that further clarification on various issues implicated by the tax is still needed. As such, the regulations constitute only the first step in defining the limits of the medical device excise tax.”
It’s clear that the complexity of the tax is causing problems both in paying and collecting the tax. That is hardly a surprise for a provision in Obamacare.
In June, 2012, the House of Representatives voted 270-146 in favor of H.R. 436, the Health Care Cost Reduction Act of 2012, which would have repealed the tax. That billed died in the Senate.
The Senate voted to repeal the device tax, but it was a non-binding amendment to the Senate fiscal year 2014 budget proposal, S. Con. Res. 8. The amendment, offered by Senator Hatch, was agreed to by a vote of 79 to 20. (The legislation does require the repeal of the tax to be offset with other funds.) All 45 Republicans voted for the amendment as well as 33 Democrats and one independent. Only 19 Democrats and one independent voted no.
Senator Hatch has introduced S. 232, The Medical Device Access and Innovation Protection Act, which would repeal the medical device tax. Of the 79 Senators that voted for the amendment to S. Con. Res. 8, only 35 Republicans and six Democrats are co-sponsors of S. 232.
Supporting the non-binding amendment to the budget resolution was an easy vote because there are no consequences. The only way S. 232 will be passed in the Senate is if there are enough Senators willing to co-sponsor the legislation in order to stop a filibuster (60 votes) and persuade Majority Leader Harry Reid (D-Nev.) to have a vote. It is likely all Republican senators would support the bill, since they all voted for the non-binding Hatch amendment and have consistently called for not only repealing the medical device tax but repealing of all of Obamacare. So far, an insufficient number of Democrats who supported the amendment to the non-binding budget resolution have co-sponsored S. 232.
Patients and taxpayers should question where their senators stand on repealing this destructive tax.
