Health Reform's Tax on Medical Devices

June 8, 2012

One of the lesser-known provisions of the massive health reform law, the Patient Protection and Affordable Care Act (PPACA) imposes an excise tax on medical equipment and supplies, effective in 2013.  Regardless of the past and recent profitability of investment in the research and development of new and improved medical devices, this tax will reduce such investment, says Benjamin Zycher, a senior fellow at the Pacific Research Institute.

First, it is important to understand that this is by no means a small tax, and therefore, its effect on investors' behavior will also not be small.

  • The excise tax is leveled at a seemingly innocuous 2.3 percent, yet it is important to recognize that this tax is on total revenue, as opposed to a tax on profits.
  • Since profits obviously are far smaller than sales, this means that the tax is a greater proportion of the former.
  • To some extent, the tax might result in an increase in market prices for the taxed goods, thus shifting some of the burden of the tax onto consumers.
  • Accordingly, even with an assumed upward price effect -- which almost certainly would not be by an amount shifting the tax fully or almost fully to consumers -- a conservative assumption of the downward impact on profits would be 10 percent.

Still, this 10 percent reduction can seem insignificant.  However, a 10 percent reduction in profits will almost certainly reduce total investment by at least that same amount.

  • Between 1999 and 2007 (the latest year for which data are available), investment increased and decreased between various years, but for the whole period the compound annual growth rate was about 2.2 percent.
  • Because the tax on medical devices is assumed to reduce investment by 10 percent, as discussed above, the future investment decline is on the order of about $2 billion per year.
  • Lichtenberg has estimated that pharmaceutical research and development investments of, very roughly, about $2,000 (in 2011 dollars) yield an increase of an expected life-year.
  • Thus, the excise tax on medical equipment and devices that reduces investment by $2 billion per year will result in the loss in expected life years of about 1 million annually.

Source: Benjamin Zycher, "ObamaCare's Tax on Medical Devices: Cuts R&D by $2 Billion a Year," Pacific Research Institute, May 2012.

 

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