One week ago, the New York Times Editorial Board published an article criticizing the medical device industry for its heavy lobbying to repeal the medical device tax, the revenue backbone of the healthcare overhaul. Companies that help treat patients should not be punished by taxation, especially if there is a chance that the tax could lead to more expensive individual healthcare.

While revenue generation is crucial to Obamacare, the funding unfairly uses the medical device excise tax as a crutch. The 2.3 percent excise tax applies to all medical device products sold in the U.S. by any medical device manufacturer or importer, with select exceptions. The tax disregards whether a company generates a net positive income, so even companies with red ink in their profit columns still have to pay the “innovation tax,” as it has been called.

In addition, the tax unintentionally affects the medical device industry’s mergers and acquisitions, which play a large role in medical innovation. Big companies are slower at churning out ideas and cannot always risk unknown research and development applications, whereas smaller companies can innovate faster but have difficulty commercializing products. Often, these smaller companies are bought out by major device manufacturers who can distribute the technology to a wider market. If smaller companies have to pay the innovation tax on their products, their net worth will decrease. Thus, quality companies will have trouble negotiating successful mergers.

Many industry experts and major industry leaders, like Boston Scientific, Stryker and Cook Medical, believe that the tax could stall innovation and competitiveness in medical device companies. One conservative economist's estimate stated that the tax could cost 64,000 American jobs due to outsourcing. Before the panic sets in, it is important to reiterate that any devices imported into the U.S. will still be taxed. However, companies may transfer some jobs overseas to balance the profit loss.

Plus, the tax may affect everyday Americans. Although it does not change the sale price of a product, it could lead manufacturers to negotiate higher sales prices to offset the tax. Payersin the healthcare system—hospitals and doctor’s clinics among others—will be affected by this change. To pay for possible price increases, they may increase the cost of admission or treatment for patients. And so, consumers will be hurt by a trickle-down effect even though they do not directly buy most medical devices.

Yes, the device industry is large and can afford to spend millions on lobbying the government, but while lobbying is the new norm, that is a poor reason to criticize an industry that is tasked with paying for a sizable chunk of the healthcare overhaul. The tax may not be the only source of money, but it does generate 29 billion dollars over the next decade in government revenue. If the tax were better crafted, it might be a different story. Perhaps taxing small items that are constantly replaced, such as bedpans, hospital sheets or tongue depressors makes sense, but taxing pacemakers, surgical tools and X-rays does not.

Companies already follow stringent and expensive FDA (Food and Drug Administration) regulations for product safety and efficacy. They perform high levels of quality testing, costing them a long go-to-market delay in product sales. Adding a tax like this on devices that are necessary for healthcare, not just convenient commodities, makes it harder for device companies to stay competitive and release products in a timely manner.

It all boils down to this: the device tax—in its unique wisdom—lumps life-saving medical device products in the same category as air tickets, alcoholic beverages and tobacco products, just some of the other goods on which excise taxes are levied.

The NYT editorial links to an article that incorrectly compares this issue to automotive manufacturers protesting car air bag requirements in the 1980s. This is not about an industry that is trying to avoid safety measures or ethical responsibility in exchange for a profit; this is about an industry built on treating and saving peoples’ lives that questions why they must be faced with the burden of financing the government’s healthcare program.

 

Reach Contributor Diya Dwarakanath here.