Editorial: If device tax is lost, special interests win

The Minnesota-led congressional charge to repeal a new tax on the medical-device industry that will help defray the cost of health care reform is another example of the outsized influence of special interests in Washington.

Instead of acceding to yet another demand by the device industry -- which has already had the tax halved, and recently won favorable regulatory reforms -- Congress needs to tell firms the hard truth.

Hospitals, drug companies and insurers have agreed to shoulder some health reform costs. The device industry isn't being singled out, especially when the 2010 Affordable Care Act will likely benefit its bottom line by expanding coverage to up to 33 million uninsured Americans. The proposed 2.3 percent device industry excise tax, which will raise about $2.9 billion a year when it kicks in next year, should not be repealed.

Minnesota Republican Rep. Erik Paulsen is a champion of a U.S. House bill that would repeal the tax. Minnesota's Democratic Sens. Amy Klobuchar and Al Franken also support repeal. Paulsen, whose district is home to many device firms, has proposed offsetting the lost device industry tax revenue by recovering some subsidies given to individuals to help buy health insurance.

That proposal would result in needy people ponying up to cover the cost of special treatment given to a wealthy industry. Last week, the White House sensibly threatened to veto Paulsen's legislation, which passed the House on Thursday in a 270-146 vote. It's not clear when the Senate will take up the issue.

While the device industry trade organization is predictably predicting massive job losses if the tax is not repealed, independent analysts have cast serious doubt on research the industry commissioned to support its catastrophic claims.

A 2012 Bloomberg Government analysis said industry claims of up to 43,000 jobs lost are simply "not credible." The research "exaggerates the degree to which spending on health is affected by price increases" and ignores "positive effect of new demand [for devices] created by the law," according to Bloomberg analyst Christopher Flavelle.

The tax is also structured so that it doesn't give companies an incentive to send jobs offshore. "The tax applies equally to imported and domestically produced devices, and devices produced in the United States for export are tax-exempt," wrote Paul Van de Water, an analyst with the Center on Budget and Policy Priorities.

The device industry faces many challenges -- many of them self-inflicted. High-profile recalls of flawed devices have given the industry a black eye. The Standard and Poor's report notes that the industry has produced "little in the way of new products that would be considered revolutionary." The tax will add to firms' challenges, but it certainly can't be blamed for all the industry's woes.

There's legitimate concern about the tax's effect on small- to medium-sized firms, which are developing products that aren't yet profitable. While some of the costs can be passed along to the device's end users -- patients, in other words -- these firms may be unduly burdened by the new tax, which is on revenue, not earnings.

Policymakers and the industry should have pushed for an exemption for these smaller firms instead of a total repeal -- this revamped option deserves consideration. It would minimize the loss of tax revenue, yet protect a vulnerable industry sector important in Minnesota and elsewhere. A trade group estimates that the 10 largest device firms will account for 86 percent of the new tax's revenue.

Unlike the new Medicare drug coverage passed under President George W. Bush, the Affordable Care Act at least attempted to provide new benefits without adding to the nation's debt. The amount of money generated by the device tax is a relatively small contribution to health reform's overall cost.

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