ACA tax has $665 million impact on medical device industry

For Kapstone Medical

A new study has found the excise tax on medical devices enacted as part of the Affordable Care Act had a $665 million impact on the medical device industry, according to an Iowa State University researcher.

Daeyong Lee, assistant professor of human development, at Iowa State University studies how different aspects of the Affordable Care Act have affected families and companies. In the study published in the June 2018 journal Research Policy Lee analyzed the 2.3 percent excise tax imposed on medical devices in 2013.

He estimated that the impact on R&D, sales, gross margins and earnings totaled $665 million since 2013. Lee explains in the paper that the tax applied to everything from needles and syringes to coronary stents, defibrillators and radiation equipment. Certain devices, such as hearing aids, eye glasses and contact lenses were exempt.

In return for the tax, the medical device industry was expected to benefit from expanded health coverage the law provided. When he looked at the actual cost for manufacturers, Lee found the tax also affected operating and marketing costs. He broke out the financial impacts showing overall reductions of:

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

Lee used different scenarios to calculate the tax effect, controlling for economic factors that might affect investment. To limit the tax effect companies could have increased prices, but he found that did not happen. Instead, companies diversified their customer base and increased global market sales, which were exempt from the tax. In addition the firms significantly reduced operating costs for selling, general and administrative expenses, but did not reduce advertising and labor expenses.

Lee did not look at any benefits medical device makers might have gained as a result of more people receiving insurance coverage for such devices.

“Since the expansion in health insurance coverage by the Affordable Care Act was made before the tax imposition, benefits that medical device firms enjoy occurred before the tax incidence,” Lee told Kapstone Medical in an email interview. “Thus, the study didn't specifically look at the benefit side to evaluate the device tax effects on firms' R&D investment.”

The impact would have been bigger, but Congress passed a moratorium on the tax in 2015 and in January 2018 extended the moratorium to 2020. Lee suggests that the moratorium should be used to consider other tax options that do not target a single industry, pointing out that the insurance industry also benefits from the increase in coverage provided by the law.

"If there is a broader tax base, the negative effects will be reduced," Lee said in a press release. "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."

The study was funded through Lee’s ongoing grants and received no funding from medical device makers for his study.

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