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Scare Talk on Medical Device Tax Doesn’t Square with Reality

Although the Senate rebuffed the House’s attempt to attach a repeal of health reform’s excise tax on certain medical devices to the fiscal year 2014 funding bill, the issue will likely resurface.  We recently updated our paper explaining why the 2.3 percent tax, which helps pay for extending health coverage to millions of uninsured Americans, is sound and why the arguments against it do not withstand scrutiny.  Here are some key facts to keep in mind.

  • The medical device tax isn’t a tax on wheelchairs, as some commentators have mistakenly reported.  The tax does not apply to eyeglasses, contact lenses, hearing aids, mechanical and powered wheelchairs, and any other medical device that the public generally buys at retail for individual use.  It does apply to such devices as coronary stents, artificial knees and hips, cardiac pacemakers, irradiation equipment, and imaging technology.
  • Health reform will boost sales of medical devices, largely offsetting the effect of the tax. By extending health coverage to 25 million more Americans, health reform will raise demand for medical devices and boost the revenue of device manufacturers.  The medical device industry correctly notes that older patients, who use a disproportionate number of medical devices, already have coverage through Medicare.  However, some of the previously uninsured people who get health coverage under health reform will undergo elective medical procedures, which in turn will expand the use of medical devices.  A study by Wells Fargo Securities finds that health reform will increase device sales by 1.5 percent in 2014 and by 3.6 percent cumulatively through 2022.  This increase, the study concludes, “will be sufficient to offset” the tax.
  • Top device manufacturers are highly profitable and can easily absorb the tax. A new report by Consumers Union examines the financial statements of 18 leading device companies and finds that they are all well situated to absorb the tax without a significant effect on their bottom line.  Investors apparently agree.  Since the tax took effect in January 2013, the stock prices of the top device manufacturers have generally outperformed the market averages.  For example, Medtronic is up 29 percent, Johnson and Johnson 24 percent, Boston Scientific 104 percent, and St. Jude Medical 46 percent — compared to a 19 percent increase in the S&P 500 stock index.

Clearly, the medical device tax is not having the dire effects that its critics predicted.