Departments
Medical Devices
Innovation under siege as Congress
aims to tax medical devices to pay for
health care reform
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Thomas Novelli |
It was only a few months ago when the U.S. device industry’s primary concerns with healthcare reform was reserved to a few critical areas of competing legislative proposals. Issues ranging from transparency of industry payments to healthcare providers, comparative effectiveness research and payment reform were thought to be the proposals most likely to affect the device industry over the next decade. However, in September 2009, the industry was thrown a curve ball when a healthcare reform proposal generated by the U.S. Senate Committee on Finance included a $40 billion “fee” on the industry.
While most of the proposals targeting the device industry will be significant, the device tax is a game-changer. The fact that it was included in the Senate Finance package strongly indicates it is likely here to stay throughout the health reform debate.
Senator Max Baucus (D-MT), Chairman of the Finance Committee, released his bill in September. Most political experts predicted that the Finance Committee bill would be the proposal most similar to what will eventually be passed by Congress. Other Congressional committees of jurisdiction in both the House of Representatives and Senate had released and passed competing versions of a health reform bill. Yet, the Finance Committee remains viewed as being the most critical.
The Senate Finance Committee has very broad jurisdiction over many federal government programs, including all tax, trade and entitlement programs such as Medicare, Medicaid and Social Security. It also historically has been one of the more bipartisan committees in all of Congress. Chairman Baucus and Ranking Member Charles Grassley (R-IA), who have interchangeably been head of the Committee since 2001, have taken great pride in working together and crossing party lines to reach rational agreements.
The so-called fee amounts to a tax
The Senate Finance Committee bill proposed to assess a fee on most manufacturers and importers of medical devices. It is expected to raise $40 billion over 10 years, or approximately $4 billion annually. The fee would be assessed proportionate to market share and on total revenue, not profitability. Most analysts estimate that this would equate to an approximate 3.5% assessment on a company’s total annual revenue.
The proposed fee would be assessed for all manufactures of Class III devices and most Class II. Exempted are Class II products sold at retail with a value of $100 or less and all Class I products. In addition, the proposal scantly carves out exceptions for small companies. The fee would not be assessed for companies with revenue at $5 million or lower. However, companies with revenues between $5 million and $25 million would have a fee assessed on 50% of revenue, and any covered company with revenue over $25 million would have the fee assessed on 100% of their revenue.
The Senate Finance Committee passed its bill in October by a razor-thin margin. When the House of Representatives passed its final legislation in November, it also included a fee on the industry totaling $20 billion over 10 years. Their proposed fee would be assessed on most device companies regardless of annual revenue, have similar device class exemptions to the Finance Committee bill, and would be implemented starting in 2013. In all, the House device fee would amount to a 2.5% annual tax on the industry.
Tax targets an innovative industry
The concept of “shared responsibility” has continually been touted by Chairman Baucus and other proponents of the tax as justification for assessing not only the device tax, but also a series of other taxes and cuts that will disproportionately affect a cross section of the health care industry. The underlying premise of the shared responsibility concept is that the overall ends of healthcare reform, increasing health insurance coverage, will ultimately benefit health care industries. Thus, the health care industry must pay their fair share because they will benefit.
While the shared responsibility concept may have greater applicability for other industries affected by health reform legislation, it is more difficult to realize for the device industry. A consistent argument used by supporters of the tax is that when there is an increased pool of newly insured beneficiaries, device companies will benefit from having an expanded customer and user base. However, this argument remains shaky at best. Many of the devices that will be affected by the tax are used in the acute care setting, and patients, regardless of their insurance status, usually will receive the appropriate medical treatment.
For instance, under both the House and Senate proposals, an acute care setting product, such as a defibrillator, would be capture under the definition of the medical device that is taxable. It is highly unlikely that a product such as a defibrillator would receive any sort of increased benefit from a larger pool of insured beneficiaries. It will not be the case that more people will be going into cardiac arrest and will need the assistance of a defibrillator. This scenario would apply to numerous other medical technologies as well.
The more important underlying impact of the device tax is that it is targeted on an industry producing innovative medical technologies. It is also an industry that is one of the few that has a positive economic growth, even in the most challenging of economic times. At a time when the federal government is working to promote investment in U.S. industries of the future, it is inconsistent that a tax of this magnitude would be considered on the medical device industry.
Currently, the U.S. is the global leader in medical devices and one of the few industries with a net trade surplus. In addition, the U.S. medical technology industry is responsible for nearly 2 million jobs, including some of the highest paying manufacturing jobs in the country. Furthermore, the medical device industry is comprised mainly of small businesses. In fact, more than 80 percent of medical device companies employ fewer than 50 people.
Losses will outweigh any gains
While there is much need to reform the health care system in the U.S., the proposed device tax is an unfortunate and misguided money grab. To make the overall health reform bills more palatable, Congressional leaders and the White House wanted to keep the total cost of the bill under $1 trillion over 10 years. To achieve this, legislators have proposed a series of taxes across multiple industries with little rationale thought as to the consequences.The device industry is one victim.
At the end of the day, whatever gain is realized from this tax on the medical device industry will pale in comparison to the losses in patient access, jobs, and innovation in the medical device industry.
Thomas Novelli is Director of Federal Affairs for the Medical Device Manufacturers Association. He can be reached at tnovelli@medicaldevices.org.
