US government permanently repeals medical device excise tax

December 23, 2019
by John R. Fischer, Senior Reporter
The controversial medical device excise tax is officially dead following the signing of a year-end government funding package Thursday by President Donald J. Trump.

The president signed the roughly $1.4 trillion agreement just before a midnight deadline, avoiding a government shutdown. A measure for the repeal was included as part of the agreement, which was given the green light by the U.S. House of Representatives on Tuesday in a vote of 297 to 120, and on Thursday by the Senate in a vote of 71-23. A component of the Affordable Care Act, the MDET levied a 2.3 percent tax on the sale of each individual medical device intended for diagnosis and treatment, an action which manufacturers asserted led to decreases in development and research for patient care, created an unfair competitive landscape between small and large manufacturers, and forced jobs to be cut in the medical device industry.

"One of the key strengths of our industry is the diverse number of large and small innovative device manufacturers in the ecosystem," Patrick Hope, executive director of the Medical Imaging and Technology Alliance, told HCB News. "These firms are heavily engaged in the R&D of new technologies to meet the specific therapeutic needs of patients. As an excise tax, the device tax places a large burden on smaller companies that often run on thin profit margins, making it difficult for these manufacturers to absorb the effects of the policy. Had the tax been implemented, these innovators would have been put in serious financial straits."

First implemented in 2013, the tax was in effect until 2015 when it was suspended in a bipartisan congressional vote. It was suspended once more in 2017. This suspension was set to expire at the end of 2019, with the law taking effect on January 1, 2020.

Supporters of the tax argue that the impact of the tax on device manufacturers is overstated, and that it is an essential source of funding for the ACA to ensure millions of Americans have access to some form of healthcare coverage.

Executive director Frank Clemente of the nonprofit Americans for Tax Fairness, says the tax only applied to about half of device makers due to exceptions in the law, and that the ability of the ACA to create more customers for the medical devices made it "only fitting" for manufacturers to "foot some of the bill" for expanding access to insurance. He adds that the failure of Congress to expand provisions such as the Earned Income Tax Credit and Child Tax Credit will add to the negative impact he expects the repeal to have on working-class families.

"Congress's failure to expand the EITC and CTC while handing huge tax breaks to the healthcare industry is a betrayal of low-income families generally, not just in terms of healthcare," he told HCB News. "By spending some $175 billion on tax cuts for profitable health insurers and medical device makers instead of using some $130 billion of that total to pull poor households out of poverty, Congress will force many working families to choose between food and rent, heat and car payments. The stress and deprivation of poverty hurts health, especially among children."

He also noted that there are device makers who have said the tax would not stop them from developing and selling products, and cited a 2015 paper by the Center on Budget and Policy Priorities that used an economic analysis of the tax by the Congressional Research Service to argue against its repeal.

"Depending on the extent to which consumers reduce their demand for medical devices in response to an increase in their price, CRS estimates that the drop in employment in the device industry could range from 47 workers (0.01 percent of industry jobs) to 1,200 workers (0.2 percent of jobs)," said the report. "In fact, health reform will likely benefit the medical device industry and boost its sales. By extending health coverage to a projected 27 million more Americans, or by nearly 10 percent, the Affordable Care Act will increase the demand for medical devices and the revenue of device manufacturers."

Opponents argue otherwise, saying that when that tax was in effect, it caused a loss of 29,000 jobs in the medical equipment industry, according to the Department of Commerce, as well as a $34 million drop in industry research and development. They assert that such a decrease in R&D innovations would make investors more hesitant to invest in products that could potentially enhance patient care, if the tax were to be reinstated.

A recent survey by Medical Alley Association members backs these claims up, with 83 percent of respondents saying the tax would have led to declines in R&D spending, and longer wait times among patients for access to technology. Sixty-seven percent said they would have to delay or forgo planned hiring, while 47 percent said they would have to put off plans to physically expand their business.

“These results confirm what we’ve heard in private meetings: the medical device tax actively chills innovation and disproportionately hurts small businesses,” said Medical Alley Association president and CEO Shaye Mandle in a statement this month when the results were made public. “There is bipartisan support for repealing the tax, and we urge Congress to act before the end of the year.”

A number of proposals for repealing the tax have been made over the last four years, with one of the most recent taking place in March when Senator Pat Toomey (R.-Pa.) and senator and 2020 presidential contender Amy Klobuchar (D.-Minn.) submitted a bill calling for its elimination.

"The specter of the reimposition of the punitive medical device tax threatens patients, American jobs, and medical innovation," said Senator Toomey in a statement at the time. "It's time to end this uncertainty once and for all and finally repeal the medical device tax.”

The agreement was made up of two spending bills, one of which contained the measure of repeal for the tax.