From the Editor — If Reinstated, Excise Tax Should Apply to Broader Base

Sherrie Trigg, Editor and Director of Medical Content

New research has confirmed what device companies have been saying since the medical device excise tax was imposed on medical devices as part of the Affordable Care Act: the tax forced them to cut funding for research and development.

Daeyong Lee, an assistant professor of human development and family studies at Iowa State University, examined how certain provisions of the healthcare reform law affected families and firms. In a study published in the journal Research Policy, he analyzed the 2.3 percent excise tax imposed on medical devices in 2013. The research shows that the tax significantly reduced R&D investment, sales revenue, gross margins, and earnings by the following amounts:

R&D expenditures – $34 million
Sales revenue – $188 million
Gross margins – $375 million
Earnings – $68 million

The study, the first to look at the actual cost for manufacturers, found the tax also affected operating and marketing costs, Lee says.The tax was imposed on the medical device industry because the industry was supposed to benefit from expanded health coverage. The tax has applied to everything from needles and syringes to coronary stents, defibrillators, and irradiation equipment. Certain items including hearing aids, eyeglasses, and contact lenses were exempt. The medical device field is one of the top five R&D intensive industries, and Lee says a decline in investment could have long-term consequences.

Lee looked at different scenarios when calculating the tax effect, controlling for economic factors that might affect investment. To limit the tax impact, firms could have increased prices, passing the burden to consumers but Lee says that did not happen, likely because of the market power of large hospitals and clinics. The data for the study is specific to large customers, not individuals.

In response, medical device firms diversified their customer base and increased global market sales, which were exempt from the tax, Lee says. The findings also suggest that firms significantly reduced operating costs for selling and cut general and administrative expenses but not advertising and labor expenses.

Congress passed an appropriations act in 2015, which included a two-year moratorium on the medical device excise tax. In January, it was extended to 2020. Given the study findings, Lee says the moratorium could provide time to consider other tax options that do not target a single industry. He suggests that policymakers expand the tax base and include other industries, such as health insurance companies, which also have benefited from increased demand as a result of the healthcare reform act.

“If there is a broader tax base, the negative effects will be reduced,” Lee says. “The government needs to raise revenue to cover the costs of the Affordable Care Act, but there are other ways to do it without harming a research and development intensive industry.”