The Medical Device Tax: Bad Policy in Need of Repeal

April 09, 2013

Affordable Care Act Provision Could Make Health Care Less Affordable

Washington, D.C., April 9, 2013—The federal medical device tax, which went into force on January 1st of this year, will have an adverse effect on the medical device industry, consumers, and the economy according to a new analysis by the Tax Foundation. Economist Kyle Pomerleau finds that the provision represents poor tax policy and should be repealed.

The 2.3 percent excise tax on the manufacturers of medical devices is part of the Patient Protection and Affordable Care Act, which was signed into law by President Obama in 2010. The provision is predicted to raise $3.2 billion dollars each year on average for the next ten years.

“This tax will result in higher health care costs, which undermines the objective of the Affordable Care Act,” said Tax Foundation economist Kyle Pomerleau. “It is also likely that this tax will adversely affect employment, innovation, and competition in the medical device industry, especially among small firms with slim margins.”

In the short term, manufacturers will try to pass the tax on to consumers in the form of higher prices. In fact, earlier this year, some hospitals expressed alarm that medical device manufacturers are beginning to bill them for the cost of the excise tax. Over the long term, however, the purchasing power of hospitals and health care organizations will reduce the ability of manufacturers to pass along the cost of the tax, likely leading to lower levels of investment in research and development and ultimately a loss of as many as 45,000 jobs nationwide.

In addition, the complexity of complying with the tax will create an additional burden on manufacturers, one that will disproportionately impact smaller companies. “For many medical device firms, adding one more person in the tax department likely means not adding one more scientist in the R&D laboratory,” said Pomerleau.

Tax Foundation Fiscal Fact No. 364, “The ACA Medical Device Tax: Bad Policy in Need of Repeal” by Kyle Pomerleau is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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