Tax Foundation Calls Medical Device Tax Bad Policy

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The cost of the Affordable Care Act’s 2.3% excise tax on the manufacturers of medical devices will invariably come out of money spent on research and development, and the pockets of patients, predicts the Tax Foundation, a Washington, D.C.-based nonpartisan research organization.

According to Tax Foundation Fiscal Fact No. 364, "The ACA Medical Device Tax: Bad Policy in Need of Repeal" by Kyle Pomerleau, health care providers, which includes diagnostic imaging facilities, already operate on tight margins because of cuts to reimbursement for their services. Therefore, they cannot easily absorb any tax costs manufacturers may seek to pass on to them. This leaves only two real options:

1. Manufacturers cut their operating costs by decreasing the amount they spend on research and development.

2. Costs manufacturers pass on to providers are then passed on again to patients, increasing the cost of health care overall.

The Internal Revenue Service (IRS) began collecting the 2.3% excise tax this year. Analysts predict the tax will raise $3.2 billion dollars each year on average for the next ten years.

The White House has maintained that the short-term pain of the tax on manufacturers will be more than offset by increased demand for medical devices as the number of insured health care patients goes up. However, laws requiring the provision of charity care and programs like Medicaid already guarantee that the poor, uninsured and underinsured will have access to medical care if they are sick or injured. It is unclear that the expansion of health insurance under the Patient Protection and Affordable Care Act will lead to a large increase in medical device sales.

"This tax will result in higher health care costs, which undermines the objective of the Affordable Care Act," said Tax Foundation economist Kyle Pomerleau in the press release announcing the report. "It is also likely that this tax will adversely affect employment, innovation, and competition in the medical device industry, especially among small firms with slim margins."

On the same day as the report was released, the House bill to repeal the tax, H.R.523 -- Protect Medical Innovation Act of 2013, reached 212 cosponsors, a majority of the House. This means that if the bill is brought up for a vote, it would pass. However, it is uncertain if it would pass in the Senate. In addition, last year, President Obama said he would veto any device tax repeal that makes it to his desk because it defunds the Affordable Care Act.