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Thursday, Apr 26, 2018
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Excise medical device tax

The U.S. Senate should follow through on its nonbinding vote last month to repeal the medical device tax, and junk this egregious threat to health care innovation and the economy. The 2.3 percent excise tax on medical devices such as artificial limbs, braces, pacemakers and CAT scans was adopted as part of the Affordable Health Care Act. It ignores the financial realities of the medical products industry. As we’ve pointed out before, the tax would be collected on gross sales, not profits. A survey found that the medical device industry only makes a profit of 3.5 percent to 4 percent. This tax would dangerously shrink that margin. Some companies would likely end up owing more in taxes than they generate in profits.
This would be devastating to new companies, which may take five years or more to become profitable. John Ray, executive director of Florida Medical Manufacturers Consortium, says the tax would be particularly damaging to the state’s rapidly growing medical device industry because 85 percent of the state’s firms employ fewer than 50 workers. They don’t generate the kind of profits needed to cover the extra cost. This financial penalty will inevitably result in fewer jobs and less investment in research. A Hudson Institute researcher estimated the industry could lose 43,000 jobs, or 10 percent of its workforce. Florida is second in the nation in medical device companies, with more than 538 device manufacturers and hundreds more component makers. More than 20,000 Floridians work in the industry, making an average salary of about $63,000. Not only will this tax wound the economy, it will undermine health care advancements. By jeopardizing companies’ return on investment, the tax almost surely will discourage medical device research. Benjamin Zycher, an economist with the conservative Pacific Research Institute, estimates the tax would cause the loss of about $2 billion in research and development each year. He calculated that the resulting loss of innovation will cost about 1 million people their lives a year. The accuracy of such projections, of course, can be disputed, but making it more costly for companies to develop and produce medical devices is certainly not going to encourage research investment. The rationale for the tax was that the expansion of health care would lead to more devices being sold and more industry revenue. But industry officials point out most of the previously uninsured individuals who will receive coverage under the law will be young, not likely customers for artificial knees or pacemakers. The Senate’s vote for repeal was overwhelming, 79-20, with even liberals such as Massachusetts’ Elizabeth Warren joining the majority. It was largely meaningless because it was passed as an amendment to the Democrats’ budget, which has no chance of passing the House. The Republican House voted last year to repeal the tax. Though majorities in both bodies know the dangers of this tax, its demise is far from assured. Democrats want a replacement tax to make up for the estimated $30 billion it would raise over 10 years to fund Obamacare. They should recognize this industry-crippling tax will likely do far more damage to America’s citizens, economy and health care system than that and jettison it.
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