The renewed attack on ‘Obamacare’ medical-device tax

In the fall of 2013, the U.S. government shut down for 16 days. Federal employees were furloughed for a combined total of 6.6 million days, the government lost billions of dollars (the lost productivity of the furloughed employees amounted to an estimated $2 billion alone), the nation’s economy was hurt, and millions of Americans temporarily lost critical services.

Amid this devastation, Congress stood deadlocked over the budget for fiscal year 2014, with the Republican-led House of Representatives proposing various resolutions in an attempt to delay and defund the Patient Protection and Affordable Care Act (ACA, commonly known as “Obamacare”) and the Democratic-led Senate responding by passing resolutions to maintain the funding with no additional conditions.

Strangely, though, as The Washington Post reported at the time, the Republicans had a second, much-smaller demand on top of delaying “Obamacare” a year: They wanted a repeal of the ACA’s medical-device excise tax, a 2.3 percent sales tax added on all medical devices (with some exceptions), which, the Joint Committee on Taxation estimated, would bring in $29 billion in funding for the health-care reform program over the next 10 years.

In the end, the Republicans had no choice but to back down, and the tax stood. But now, a year later, it’s back under the gun.

The 2014 midterm elections gave Republicans control of the Senate and elevated Sen. Orrin Hatch, R-Utah, to president pro tempore–designate and future chairman of the Committee on Finance, which devises new taxes. Hatch has long been an outspoken opponent of the medical-device tax and, in March, introduced a measure to repeal it. It appears the tax will be at the top of Hatch’s agenda in his new leadership role. “The senator will continue to examine and support every viable opportunity to permanently repeal Obamacare’s onerous tax on medical devices,” Hatch spokeswoman Julia Lawless told Reuters. Incoming Senate Majority Leader Mitch McConnell, R-Ky., has also been a vocal opponent of the tax: He was the driver of the demands that shut the government down in 2013. Meanwhile, newly elected Republican representatives have been raising the possibility of killing the tax in postelection interviews and press conferences. 

With much larger “Obamacare” funding sources still on the table — including a tax on health insurer, expected to raise $60.1 billion over 10 years, and an excise tax on pharmaceuticals, which, estimates indicate, will bring in $80 billion — it is perhaps surprising to see Congress so aggressively target this relatively small tax.

“If you want to take the cynical viewpoint, some would argue that it was a conscious effort on the part of opponents of the ACA to target the weakest member of the herd,” said Gregory Jenner, a former tax counsel for the Senate Committee on Finance and current partner in the law firm Stoel Rives. Jenner (who helped pass the Tax Reform Act of 1986 — commonly known as the second of the two Reagan tax cuts) notes that of all the possible “Obamacare”-related tax cuts, the one for medical devices would most easily win bipartisan support.

In fact, earlier this year, with the Republicans still in the minority, the Senate voted overwhelmingly in favor of Hatch’s measure, with 33 Democrats joining Republicans on the winning side of a 79-to-20 tally. The vote was entirely symbolic — the measure was introduced as a means of opening up dialogue on the issue and was not to propose an actual bill — but does not bode well for those in favor of the tax.

“A new Republican Congress will want to do something early on to attack the ACA, and they will want one that will be successful,” said Allison Hoffman, a professor of health care law and policy at the University of California at Los Angeles.

Many of the Democrats who are most outspoken about the issue represent states that large medical manufacturers call home. Rising Democratic Party superstar Elizabeth Warren, a liberal icon and staunch “Obamacare” supporter, has been uncharacteristically opposed to the tax, going so far as to write an op-ed calling for its repeal. She happens to be the senior senator from Massachusetts, which is the country’s second-largest employer of people in the medical-device industry, behind only California (which has more than six times as many residents). Minnesota Sens. Al Franken and Amy Klobuchar, both Democrats, are also against the tax; the Land of 10,000 Lakes is home to a robust medical-device industry, including Medtronic, the world’s fourth-largest medical-device company. (As of publication, the offices of Warren, Franken and Klobuchar did not respond to phone or email requests for comment.)

Medical-device makers argue that the tax is destroying their industry. A fact sheet published by the trade association Advanced Medical Technology Association, or AdvaMed, says that, based on responses to surveys sent out to member organizations, the tax has led to the loss of an estimated 14,000 jobs in the medical device industry, the “forgone hiring” of an additional 19,000 workers and the loss of 132,000 jobs defined as indirect employment. (The sector employs 400,000 Americans directly and 2 million in support, according to Forbes.) In addition, the fact sheet says that the tax forced the industry to reduce research and development spending, move jobs abroad and lower employee salaries, among other negative consequences.

But a recent Congressional Research Service analysis of the medical-device tax came to a much different conclusion: The report estimates that output and employment in the industry would drop no more than 0.2 percent — and that most of the tax would be passed on to consumers in the form of higher pricing. And FactCheck.org, a project of the Annenberg Public Policy Center of the University of Pennsylvania, recently reported that claims that jobs were being lost overseas because of the tax were greatly exaggerated.

Industry analysis backs up the CRS and Factcheck.org reports. An Ernst and Young report published last month found that revenues for medical-technology companies grew 4 percent in 2013, to $336 billion and that research spending increased by 7 percent and head count grew by 5 percent that year.

In response to questions about the discrepancy, Wanda Moebius, an AdvaMed representative, issued a statement that “the CRS analysis is fundamentally flawed” because it does not take into account the purchasing power of medical-device buyers such as hospitals, clinical labs and doctors’ offices. “Such purchasers,” the statement says, “have the ability to refuse to accept price increases.”

Jane Gravelle, one of the authors of the CRS report, said in an interview with Al Jazeera America that the argument makes no sense: Why, if those purchasers have that kind of power, haven’t they been flexing it until now? In addition, she said, “To argue that there’s no effect on price but there is a big effect on jobs is an inconsistent argument.”

Since the Affordable Care Act passed, the medical-device industry has fought it tooth and nail. In 2012, AdvaMed ran a print and online ad campaign and sent Republican congressional candidates a packet of information urging them to fight the tax.

Campaign-finance records show that medical-device companies spend about $30 million a year lobbying Congress, and their political-action committees gave $2.3 million directly to Republicans in the past election cycle. The biggest recipient of industry contributions in the 2014 campaign cycle was Rep. Erik Paulsen, R-Minn., the sponsor of the House bill to repeal the tax. The industry has contributed to Democrats too: According to the Federal Election Committee, AdvaMed gave Ron Kind, a Democratic representative from Wisconsin, $7,350 (more than they gave any other individual) during the 2014 cycle — one year after he led the reintroduction of the Senate bill to repeal the excise tax. But records show that since the introduction of “Obamacare,” the industry has tacked heavily to the right, giving nearly twice as much to the GOP, which it sees as its strongest ally in repealing the tax, as to Democrats in the last two election cycles.

While the CRS disputes AdvaMed’s position on the financial implications of the tax, the research organization also says that the tax is an inefficient way to raise revenue. “Viewed from the perspective of traditional economic and tax theory, the tax is challenging to justify,” the authors write.

The underlying theory behind the tax was akin to that of a windfall-profit tax. If insurance coverage was broadened, more people would be likely to get implants and other medical devices, and profits for manufacturers would rise. “In effect,” said Jenner, “You are taxing the advantage some of these industries would be getting [from the ACA].” But it would be more effective, both the CRS and Jenner argue, to raise the needed revenue from a broad tax base, rather than through an excise tax.

Both Jenner and UCLA’s Hoffman said that despite the strong support for repeal, it may not happen as easily as proponents hope. For one thing, any new bill to kill the medical-device tax must, by law, be budget-neutral, which means either creating a new tax to replace it or cutting spending elsewhere. In addition, repealing the tax would require a veto-proof (two-thirds) Senate majority in case President Obama chooses to invoke his executive powers). And it’s not clear that support for the movement is that strong. Then again, Obama may decide not to fight this particular battle.

If the medical-device tax is eventually repealed, it will obviously have an immediate impact on funding for the ACA. But more troubling, according to Hoffman, is that a repeal could lead other health-care interests — such as insurance providers and pharmaceutical manufacturers — to “rally around fighting their taxes. The others are considerably bigger.” In total, excise taxes tied to “Obamacare” (from medical devices, pharmaceuticals and high-value insurance plans) are expected to raise $370 billion over the next decade.

“If Congress is willing to take one off the books,” asked Hoffman, “will they take others too?”