Could restructuring the medical device tax break the D.C. logjam?

  • Article by: EDITORIAL BOARD , Star Tribune
  • Updated: October 11, 2013 - 11:18 PM

Consider alternatives to a full repeal in the ongoing budget talks.

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Even from Minnesota, it’s clear that the political momentum behind yet another wrongheaded push to repeal a new medical industry tax is gathering strength in Washington, D.C.

Despite being part of a health industry coalition that sent a letter to President Obama vowing to do “our part” to make health reform “a reality” in the run-up to the Affordable Care Act’s 2010 passage, the medical device industry has fought fiercely over the past three years to repeal a 2.3 percent excise tax.

The tax, which is expected to raise about $2.9 billion annually mostly from the industry’s largest firms, helps pay for expanded medical coverage under the law. Insurers and drugmakers, which benefit as well from wider access to their products and services, are also helping to shoulder the cost of reform.

The push to repeal the device industry tax never achieved critical mass in Congress. But as negotiations intensified late this week to raise the nation’s debt ceiling and end the federal government shutdown, a repeal looks increasingly likely. Quoted in the congressional newspaper The Hill on Thursday afternoon, Republican Sen. John McCain said a repeal will be a “fundamental” part of any Senate GOP proposal and any final agreement.

Fully repealing the device tax may well be good politics, but it’s bad policy. That’s why the Star Tribune Editorial Board continues to oppose a full repeal, while leaving the door open to restructuring the tax to reduce its impact on small- and medium-sized firms, many of which call Minnesota home. One suggestion: Shift the tax on device firms to cover profits instead of revenue.

The reason that repeal is good politics is that it could help break the dangerous logjam in Congress over the debt ceiling and shutdown. There’s support for a repeal not only from tax-averse, anti-Obamacare Republicans but also from Democrats, such as Minnesota Sens. Amy Klobuchar and Al Franken, who have large device firms in their home states. The repeal could be one limited blow the GOP could strike against the ACA that Democrats could swallow. Assured bipartisan support when both parties sit down to the negotiating table after the debt ceiling is raised and the shutdown is ended could help move the process forward.

At the same time, there are solid reasons to oppose a total repeal. No offset has yet been specified to recoup the lost revenue, meaning that a key solution to a current stalemate over government spending could increase deficit spending.

A total repeal would also grant special treatment to a wealthy industry. Why should it get a pass on shouldering some of expanded coverage’s costs when others in the health industry do not? It’s hard to buy protests by AdvaMed, the device trade association, this week that its industry deserves an exemption because of downward price pressures on its products.

What part of the health care industry isn’t feeling that pain as reform rolls out? Simply doing business in the new health care reality doesn’t count as your “contribution” to better coverage, a dubious claim that one Minnesota device firm CEO made this week to an editorial writer.

Catastrophic claims that thousands of jobs will be lost as a result of the tax have been deemed “not credible” by a Bloomberg Government analysis and dubbed “nonsense” by one New York device firm CEO. In addition, a Standard & Poor’s report noted an overlooked point: The excise tax can be used as an income tax deduction, so the increase actually nets out to 1.5 percent.

These arguments aren’t likely to deter the momentum behind the repeal push. But as calls for negotiation continue in the budget talks, the repeal should be the subject of negotiation as well.

Shifting the tax from revenue to profits would benefit companies that are developing new products (they may have revenue but no profits) yet wouldn’t exempt bigger, more profitable firms in the industry from doing their part to help make the ACA a reality. (This week, AdvaMed said the letter in which the industry vowed to do “our part” applied only to cost reduction, not paying for coverage.)

Restructuring the tax this way could also potentially lighten the burden on large firms, depending on the percentage set. This would help ensure that these firms could continue to invest in start-ups as venture capital becomes harder to come by.

To be clear, few if any in Congress are talking about the partial repeal option or delaying the tax — another middle-ground option — nor is there industry support. No formal cost analysis has been done or offsets discussed. But these options merit debate, because the device tax looks like it could help smooth the way out of the budget morass. A rollback doesn’t have to be all or nothing.

  • Industry’s view

    “We are very pleased with the broad bipartisan interest in repealing the device tax, and the level of focus and attention to this urgent issue. This tax is a significant burden on large and small companies alike, and repealing it is the best solution. We urge Congress to act [this year] to address this onerous tax, which has already resulted in lost jobs [and] cuts in R&D and threatens our global leadership in the development of new medical technologies.”

    STEPHEN UBL, president and chief executive of AdvaMed, a trade association

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