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Medical device tax needs to stay

May 22, 2013|MICHAEL HILTZIK
  • Sen. Amy Klobuchar (D-Minn.), shown at an unrelated event in January, is spearheading a campaign to repeal the medical device excise tax.
Sen. Amy Klobuchar (D-Minn.), shown at an unrelated event in January, is… (Bennett Raglin / Getty Images…)

The chief drawback of a law as complex as the Affordable Care Act, the health insurance reform measure passed in 2010, is that it provides self-interested opponents a multitude of places to stick a wedge in and hammer away.

But you'd be hard-pressed to find a campaign against the ACA as narrow-minded and dishonest as the one mounted by medical device manufacturers.

For The Record
Los Angeles Times Friday, May 31, 2013 Home Edition Main News Part A Page 4 News Desk 2 inches; 62 words Type of Material: Correction
Medical device tax: In the May 22 Business section, a column about an excise tax on medical devices said that the industry employs 13,000 workers in California, accounting for seven-tenths of 1% of state employment. In fact, the industry in 2011 employed 72,000 workers in California, according to an industry survey. Those workers represent four-tenths of 1% of civilian employment in California.

This industry, which encompasses makers of everything from tongue depressors to MRI machines, has been grousing from the outset about an excise tax of 2.3% the act imposes on sales of its products. The levy was designed to generate about $30 billion over 10 years, starting this past Jan. 1, when it went into effect. Certain "devices" customarily provided directly to consumers at

retail, such as eyeglasses, hearing aids, sterile bandages and wheelchairs, were exempted.

For reasons we'll get to in a moment, repeal of the medical device excise tax has been looked upon favorably on Capitol Hill far more than any other attack on the ACA. More interestingly, it's a bipartisan effort.

Spearheading the repeal campaign is Sen. Amy Klobuchar (D-Minn). A symbolic vote in the Senate last March passed 79 to 20, with 33 Democrats, most of whom are otherwise staunch supporters of the ACA and many of whom have otherwise impeccable progressive credentials, voting in the majority. Among them were Democratic Sens. Elizabeth Warren of Massachusetts and Al Franken of Minnesota.

But they're in the wrong. The medical device tax needs to stay put.

There were two ideas behind the tax. One was that the device industry, in general, was positioned to reap appreciably higher revenue from the act, which would add as many as 30 million Americans to the rolls of the medically insured while encouraging the use of

technology to increase the efficiency of healthcare delivery.

The other was that Congress was under the gun to make the ACA "revenue-neutral," especially to the extent it improved access to care via the expansion of state Medicaid programs. Those costs were to be offset by taxes or cost reductions elsewhere, so the federal budget deficit could stand serenely unaffected.

As many people have discovered, this produced a melange of benefits and sacrifices that extend throughout the healthcare system. To pay for the ACA, Congress imposed new taxes on more generous "Cadillac-plan" health insurance policies, new annual fees on health insurers and pharmaceutical manufacturers, even a tax on indoor tanning services.

Medicare taxes paid by the wealthy were increased, and flexible spending plans, which reduce taxes for middle-class workers, pared back. Physicians and hospitals that serve Medicare patients will see their reimbursements reduced.

The medical device industry talks as though it's uniquely burdened by its share of these trade-offs. Its pitch is that the tax will destroy innovation in the industry, put small companies out of business, send thousands of jobs overseas and drive up costs for consumers. "This very targeted excise tax is going to lead to bad outcomes across the board," says JC Scott, the government affairs executive at the Advanced Medical Technology Assn., or AdvaMed.

Yet AdvaMed's claims have been subjected to outside analysis and found wanting. AdvaMed's claim that the excise tax would drive employment abroad is based on an analysis it commissioned from Diana and Harold Furchtgott-Roth, two free-market economists who assert rather than document the employment effect, and none too vigorously, at that. "Some manufacturing ... may shift offshore as a result of the new excise tax to minimize losses," they write, wanly.

Yet the logic here is questionable, since the tax is imposed on sales of devices in the U.S. no matter where they're produced, and devices produced in the U.S. are exempt if they're sold abroad. The authors' suggestion that companies might move jobs overseas to make foreign sales more profitable overlooks one over-arching fact about the medical device market: It's hugely dominated by the United States. In 2008, according to a Milken Institute report AdvaMed referred me to, the U.S. accounted for fully 41% of the industry's $210 billion in worldwide sales. No one else was close -- second place belonged to Japan, with 10%.

The industry can't cite a single objective study that supports its contentions that the tax will suppress innovation in the field and make U.S. manufacturers globally uncompetitive. When I asked AdvaMed for the best research, here's what I got: two studies commissioned by AdvaMed itself, including the Furchtgott-Roths'; and four from libertarian or anti-tax organizations -- the Pacific Research Institute, the National Center for Policy Analysis, the Business Roundtable and the Heritage Foundation. The last of these was largely based on the NCPA paper and a quote from an AdvaMed official. The polite term for that is a "daisy chain."

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