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More Bogus Economics from the Medical Device Industry

Industry lobbyists have trotted out still another bogus economic analysis in their campaign to repeal the health reform law’s 2.3-percent tax on medical devices (cardiac pacemakers, wheelchairs, surgical gloves, and so on).

A 2011 study financed by AdvaMed, an industry trade association, alleged that the tax would cause 10 percent of device manufacturing to move offshore, leading to the loss of 43,000 U.S. jobs.

In reality, however, the excise tax creates no incentive whatever for manufacturers to move production overseas, as we have explained.  It applies equally to imported and domestically produced devices, and devices produced in the United States for export are tax-exempt.

Bloomberg Government recently concluded that the study is “not credible.”

Now AdvaMed has commissioned another study, but it’s not credible either, and AdvaMed distorts its results.  AdvaMed hired the consulting firm Battelle to assess the effect of a “hypothetical economic event that results in a $3 billion decline in the [medical device] industry.”  (The medical device tax is projected to yield about $3 billion in annual revenues.)  Battelle uses what economists call an “input-output model” to conclude that this “hypothetical economic event” would cause a loss of 39,000 jobs — about 10,000 in the medical device industry itself and the rest in other sectors of the economy.

What’s wrong with this latest analysis?  First, there’s no reason to think that the medical device tax will cause a $3 billion drop in the sale of devices.  A 2006 study by Mathematica Policy Research found that demand for health-related items falls by just 2 percent for every 10 percent increase in price.  If this finding applies to medical devices, the Battelle study overestimates the tax’s impact on medical device sales (and thus on employment) by a factor of five.  Moreover, additional demand for medical devices from the millions of new customers who will gain insurance coverage through health reform could offset any drop in demand stemming from the tax.

Second, input-output models are not an appropriate way to analyze how changes in a given industry affect the economy as a whole because they don’t take into account any related changes in government fiscal or monetary policy.  For example, under the federal government’s “pay-as-you-go” law, Congress would have to offset the revenue loss from repealing the medical device tax by raising other taxes or cutting spending — either of which would reduce the demand for goods and services.  The Battelle study ignores that fact.

As The Economist rightly concludes, the effect of the excise tax on the medical device industry will be “trivial compared with other shifts,” such as “scandals, recalls, stingy customers, [and] anxious regulators,” all of which have left the industry in a “rut.”