The Facts About Medical Device Tax

The Medical Device Tax has been a divisive issue since even before the Affordable Care Act (ACA) came into effect. Lobbyists for the medical device industry have repeatedly sought to have the tax repealed, arguing that it:

  • Stifles innovation in the medical device industry
  • Reduces employment in the industry
  • Incentivizes overseas rather than domestic job creation

The ACA requires device manufacturers to pay a 2.3 percent excise tax on the sale of their products. Congress has thus far resisted efforts to repeal the tax, which Obama administration representatives say is necessary to offset the cost of expanded coverage for millions of previously uninsured Americans. In analyzing the opposition’s claims, a closer look at the realities of the Medical Device Tax can prove worthwhile.

Manufacturers Are Not Incentivized to Relocate

The argument that the tax encourages jobs to shift overseas may not hold up to scrutiny. Consider the law’s provisions:

  1. Medical devices produced in the U.S. but sold abroad are not taxed
  2. The tax only applies to devices sold in the U.S.

As such, you can see that the tax alone doesn’t incentivize manufacturers to shift their operations abroad. Moreover, since foreign manufacturers also pay the tax if they sell their products in the U.S., the tax doesn’t disadvantage domestically based companies.

Increased Demand Increases Innovation

A study conducted by the Congressional Research Service found that the tax might be too small to have a pronounced impact on device manufacturing operations. If millions of previously uninsured Americans now receive treatment that they previously would not have, demand for the requisite medical devices may rise with them.

Though the tax is naturally an additional manufacturing cost, the increased demand may well be sufficient to offset it, and in turn, product innovation will be there to meet demand. There is also the consideration that the promotion of more cost-effective treatments can itself spur innovation without outside interference.

Few Jobs May Actually Be Lost

The Congressional Research Service forecasts relatively minor shifts in unemployment at best. In cases where the relatively inelastic demand for medical devices does cause unemployment, CRS estimates it at no more than between .01 and .02 percent. In addition, the owners of medical device manufacturing firms should be able to pass at least some of their tax burden to other entities in order to offset products costs and maintain their profit margin.

Considered alongside the aforementioned demand increases, it’s likely the industry could see increases in both sales and employment. Indeed, data provided by the National Center for Health Research shows that medical device industry profits have remained strong since 2013, even with the tax in effect.