Affordable Care Act's Medical Device Tax Is Counterproductive

April 16, 2013

The Affordable Care Act's (ACA) medical device excise tax is poorly targeted and creates distortions in the medical device industry that will lead to higher costs. Because the medical device tax will stifle innovation with its complexity and compliance costs, the medical device tax should be repealed immediately, says Kyle Pomerleau, an economist at the Tax Foundation.

  • The medical device tax increases the per-unit price of a good by 2.3 percent at the point of the manufacturer and before the medical device reaches the wholesaler or hospital.
  • The purpose of this tax is to raise $3.2 billion each year for the next 10 years. It is intended to capture the excess gains that medical device manufacturers are expected to receive as medical expenditures rise under the ACA.
  • According to the language of the tax, a medical device is intended for use in diagnosing, curing, mitigating, treating or preventing a disease "in man or other animals."
  • The tax has a retail exemption for common items purchased directly by the public.
  • Common devices that would be subject to the tax are pacemakers and defibrillators; exempted items would include eyeglasses, contact lenses and hearing aids.

Besides simply increasing the cost of production and consumer prices, the tax will stifle innovation, employment and competition.

  • The medical device industry will have a reduced incentive of innovate because the tax is levied regardless of whether the device manufacturer makes a profit.
  • Reduced innovation could lead to lower employment and consolidation, and new firms will have a harder time becoming profitable with this additional tax.

The compliance burden associated with the tax is especially burdensome on small firms that will have to sacrifice resources elsewhere to comply with the tax.

  • The tax is challenging for the medical device industry because it requires many manufacturers that sell directly to hospitals to calculate a wholesale price on which to base the tax on.
  • This uncertainty is not translated into the price because consumers typically pay for medical care through insurance, which will likely pay a majority of this 2.3 percent increase.

Despite the ACA's goal of lowering the cost of health care, the medical device tax will raise costs for consumers and must be repealed.

Source: Kyle Pomerleau, "The ACA Medical Device Tax: Bad Policy in Need of Repeal," Tax Foundation, April 9, 2013.

 

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