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Shared responsibility and the medical device tax

Posted by John McDonough  October 14, 2013 08:36 PM

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So eliminating the 2.3% tax on medical devices that was part of the financing of the Affordable Care Act/Obamacare is now on the chopping block as part of the contentious budget and debt limit negotiations in Washington DC.

device tax.pngDoes this matter and what are the implications for the ACA?

In the larger scheme of things, this is not a big deal. Elimination will not harm the cornerstone policy initiatives in the ACA, and will have zero impact on the Medicaid expansions, the private insurance expansions and subsidies, the delivery system reforms, or pretty much anything else.

The device tax is one of the smaller elements of a large package of financing provisions to pay for the ACA. Yes, the ACA pays for itself and does not increase the federal deficit (I know Obamacare haters can't stand to hear this, and it's true -- Obamacare reduces the federal deficit, demonstrated repeatedly by the Congressional Budget Office and the Medicare Chief Actuary). And because the Medicaid expansion will roll out much more slowly than expected when the ACA passed, due to the June 2012 US Supreme Court decision that made the expansion a state option, the loss of $29 billion (2013-22) in revenue from cancelling the device tax likely will not change the ACA's overall favorable financial balance.

Politically, agreeing to a device tax repeal may enable President Obama to appear non-rigid on his signature initiative and willing to negotiate with Congress, albeit on a non-fundamental policy aspect.

So what's not to like? This:

The ACA's financing reflects a fundamental principle of responsible governance -- shared responsibility.

First, consider this real-life alternative -- irresponsible governance:

In 2003, a Republican President, Senate, and House approved the largest expansion in Medicare since its creation in 1965 by adding an outpatient prescription drug benefit. Good thing, except for the financing. The Republican President and Congress chose to finance "Part D" 25% from enrollee premiums and 75% via adding the cost to the federal debt. So between 2010 and 2019, while the ACA will reduce the federal debt by about $120 billion (2010 CBO estimate), the Part D program will increase the federal debt by about $1T, that's T for trillion.

In 2010, a Democratic President, Senate, and House rejected that financing precedent and established from the start of the health reform process in 2009 that the ACA must have no negative financial impact on the federal deficit or debt. And after its signing, the independent analysts declared, "mission accomplished."

To achieve this, the ACA crafters borrowed a theme from the 2006 Massachusetts health reform law dubbed "shared responsibility" -- everyone had to have a piece of the action in making the ACA succeed. So the ACA's financing was drawn from multiple sources: high income wage earners have to pay new Medicare taxes of about $200 billion; the insurance industry gets hit with $200 billion from changes to Medicare Advantage and new fees; hospitals pony up $155 billion in Medicare cuts; the drug industry forked over about $90 billion; uninsured individuals have to get insurance or pay a fine; even the home health care industry ponied up $40 billion in Medicare cuts. (All figures based on 2010-19 CBO estimates.)

And the medical device industry? $20 billion (apples to apples: that's 2010-19; the 2013-22 estimate is around $29 billion, or close to $3 billion per year).

Was the medical device industry hostile to reform? No, not at all. It's trade organization, called AdvaMed, was an early booster for national health reform in 2007-8, and signed onto a multi-industry letter in May 2009 expressing a commitment to achieve $2T in unidentified health system "savings" over ten years to help pay for reform. AdvaMed even developed its own national health reform proposal in 2008 that looks a lot like the ACA, with one noteworthy exception. AdvaMed proposed that the entire $1T cost of health reform should be simply lathered on top of the federal debt -- nobody has to pay anything. So much for fiscal responsibility.

The President and Congress said, we like your plan except for the financing part, and as part of financing, here's a 2.3% new tax on the price of medical devices sold in the U.S. by a manufacturer, producer, or importer, including any Food and Drug Administration defined device intended for humans except eyeglasses, contact lenses, hearing aids or anything available for the public at retail for individual use. Notice that exports by U.S. manufacturers are not touched, and imports of devices by foreign firms are. So the industry claim that the tax harms exports and benefits imports is flat out false. By the way, the fee took effect on December 31, 2012. It's been in effect for nearly ten months now.  Noticed?

Initially, during the health reform process, Senate negotiators asked the industry to commit to a $60B tax and AdvaMed negotiators countered by offering zero. The Senate Finance Committee markup put the tax at $38.9B; Senate Majority Leader Harry Reid dropped it to $19.2B; and the final version ended up at $20B. Unlike every other industry player in the process (including the insurance industry, which was willing to concede up to $80B in financing), AdvaMed never moved off zero. And before the ink was dry on the ACA, they started campaigning to repeal the tax.

The industry likes to claim that they will see zero benefit from the ACA's coverage expansion to some 25 million Americans. Undermining that claim, here's a snippet from an April 1 2013 analysis by Wells Fargo Securities:

"Based on our new analysis, we estimate increased healthcare coverage represents a 1.5% tailwind to U.S. volume across 10 key device categories in 2014 vs. our previous estimate of 0.6% ...

"Our analysis also showed that in general, the incremental utilization benefit in 2014 is greater for orthopedic procedures at 1.8% vs.cardiovascular procedures at 1.0%, perhaps not surprising based on the elective nature of many of the orthopedic procedures. Based on cumulative benefit to U.S.volume of 3.6% from 2012-22, we believe this will be sufficient to offset the 2.3% medtech tax. We also expect the procedure volume benefit to offset at least some of the potential incremental pricing pressure from implementation of Accountable Care Organizations and bundled payments."

But, cries the industry, small firms and start-ups will suffer. OK, if that's the concern, come to the table and renegotiate the formula to exclude start-ups and smaller firms; put all the burden on the big-boys such as Johnson & Johnson which, by the way, publicly supports the ACA and the medical device tax. According to a 2011 analysis, the top ten medical device firms will pay fully 86% of the tax.

The campaign to repeal the device tax has nothing to do with good policy or good governance, and everything to do with our federal government's ocean-sized cesspool of cash and interest group influence. That's all. Nothing else and nothing new. Medical device makers as victims of oppression? Cry me a river.

Here's one other bit of delicious irony. If Congress and the President repeal the Device Tax and eliminate this $30B source of revenue, will they replace it? Not a chance. Because for Republicans, in spite of their rhetoric, it's not about fiscal responsibility or good governance, it's about dancing to the tune of the money.  They have learned nothing since 2003.

No harm done from repeal, except to the value of responsible governance.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »


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