Q&A: The medical-device excise tax

Despite being passed more than three years ago, Republicans and Democrats are still battling over the fate of the Patient Protection and Affordable Care Act, or the Affordable Care Act (ACA) for short.

One of Republicans' main demands is that the medical-device excise tax be removed from the bill. But what is this tax, and how did it become such a central part of the fight surrounding health-care reform?

1. What is the medical-device excise tax?

Inside the 2,400 or so pages that make up the ACA are dozens of budget-balancing tools that include both new taxes and cuts to certain programs like Medicare. They’re designed to prevent the ACA from adding to the U.S. deficit. The medical-device excise tax is one such tool.

If it’s not repealed, it will go into effect on Jan. 1 and require device manufactures to pay a 2.3 percent tax on the manufacture and importation of medical devices – such as pacemakers, heart-rate monitors, implants or tools used in surgery.

The tax would bring in $29 billion over 10 years, significantly reducing the cost of the ACA.

The Obama administration has countered complaint from manufacturers over the new tax by saying that the ACA will provide the medical-device industry with a much larger customer base to sell to. In other words, they’ll make up for the 2.3 percent tax levied against manufacturers.

But, like anything that involves billions of dollars on the line, this claim is not without controversy.

2. So why is the device tax so controversial?

Well, $30 billion is a lot of money. But the reason the device tax is so controversial – as opposed to, say, Medicare cuts, or new fees for the pharmaceutical industry and health insurers – is complex.

For one, the medical devices industry is big. Medical-device companies generate about $100 billion in revenue in the U.S. annually. The device industry doesn’t want that big bottom line affected negatively.

According to industry-funded studies, the tax could cost companies almost a fifth of their profits, forcing them to lay off thousands of workers and start making devices overseas. They also say that decreased profit will lead to decreased innovation and higher costs for consumers.

Supporters of the tax say those numbers simply don’t add up. For one, they say any imported device would be subject to the same tax, and therefore be no more attractive to buyers after the ACA is implemented.

Supporters also point out that the medical-device industry will attract lots of additional customers thanks to the ACA.

“There are going to be 25 million more people with health-insurance coverage, so to some extent, the device industry will get more business,” said Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities. “That’s an increase of 10 percent. Even if the device industry doesn’t get 10 percent more customers it will get something.”

3. Who are the players involved in trying to stop the device tax?

As with most big businesses, the medical-device industry has a large lobbying potential. That could explain why the effort to stop the tax is a more bipartisan one than most. In 2011, 30 Democrats in the House of Representatives voted against the tax. Several prominent Democratic senators, even ones that are usually considered left-leaning, have come out against the tax, including Elizabeth Warren, Mass.; Al Franken, Minn.; and Amy Klobuchar, Minn. It may not be a coincidence that these senators are from states that have large medical-device industries. All three senators received hundreds of thousands of dollars from medical companies or individual health professionals in their last campaigns, according to the Center for Responsive Politics.

But no one is immune from the industry’s money. The medical-supplies industry spent $150 million since the tax was announced to convince lawmakers from every state to repeal it.  

4. So why is the device tax coming up now?

President Obama and other Democratic leaders have repeatedly said they will not remove the device tax from the ACA, even if it would result in Republicans dropping their budget fight. But Republicans are still insisting that the tax be repealed. The House of Representatives passed a bill over the weekend reaffirming that stance. It called for a one year delay in the implementation of the ACA, and the repeal of the device tax.

Some believe that Republicans’ call for the removal of the tax is less of an economic move than a political one.

“Clearly getting rid of the tax without paying for it will increase the deficit and they’ll have to figure out something else to cut to pay for it,” said de Water. The attempted removal “has to be viewed as one prong in a many-pronged effort by Republicans to kill health reform.”

That’s why the Democrats aren’t budging on the tax either.

5. Would it be a big deal if the tax were removed?

It could be. The financial viability of the ACA rests on revenue generators such as the medical-device excise tax.

Providing millions of Americans deep discounts on insurance will likely cost the government hundreds of billions of dollars. That’s why the ACA includes dozens of new revenue streams for the government. The device tax is one of the biggest. Without it, the ACA would cause the government to hemorrhage money.

Al Jazeera