Tea Party may have hurt chances for device tax repeal

WASHINGTON – Business and political leaders trying to repeal the medical device tax connected to national health care reform hope to build on the publicity the tax received during the recent government shutdown and debt ceiling crisis.

But as the nation's budget negotiations continue in the weeks ahead, the push to kill the device tax as part of the ill-fated effort to defund the Affordable Care Act, often called Obamacare, may have created as many problems as opportunities for those who want the tax dead.

Repealing the device levy became "the shield at the front of the army" of Tea Party congressional lawmakers who pushed for a shutdown and near default to eliminate Obamacare, said Don Kettl, dean of the University of Maryland's School of Public Policy. Fair or not, the medical technology industry's goal to kill the tax will be associated with the fallout of that political failure, he added.

"[Devicemakers] were swept underneath the same tent," Kettl said. "They ended up finding themselves aligned with it."

Lawmakers who pushed the device tax repeal into the battle strongly reject the notion that their goal has been compromised.

"I don't have any reservations that [device tax repeal] has been tarnished at all," said Republican Rep. Erik Paulsen of Minnesota, who wanted the tax's repeal made part of any House budget bill. "If anything, we have gained more support going forward."

Devicemakers, including hundreds from Minnesota, have been paying the 2.3 percent tax on certain device sales since Jan. 1, pouring an estimated $2 billion into the federal treasury. The collections help pay for the expansion of health care coverage under Obamacare.

The tax's supporters, however, say any ill effects are overstated because Obamacare will provide devicemakers with enough newly insured patients to offset the cost of the tax.

Ultimately, a repeal of the device tax was not included in last week's legislation to reopen the government and raise the debt ceiling. But the decision to include an elimination of the tax in the Republicans' unsuccessful attempt to defund Obamacare has sparked differing views about the tactical wisdom.

Paulsen concedes that Tea Party demands to kill or diminish President Obama's signature legislation kept the device tax repeal from playing a more positive role in the shutdown/debt ceiling saga.

"If we [Republicans] had more realistic attitudes or expectations about what was achievable, [repealing the tax] could have been the linchpin that would have solved the whole impasse a whole lot earlier," he said.

Still, Paulsen expects the device tax repeal to be part of a budget deal required by Dec. 13 under legislation passed last week to reopen the government and raise the debt limit. If not, he expects it to be part of a tax reform plan or part of a continuing resolution funding the government.

"I think it's pretty clear that it will continue to be on the table going forward," Klobuchar said.

Former Minnesota congressman Vin Weber, now a Washington lobbyist, said having the device tax repeal mentioned in talks among Senate moderates should "immunize" the device industry from any association with the negative politics of the shutdown and debt ceiling debate.

Putting the device tax repeal into the House's proposal for ending the government shutdown attracted "unprecedented attention," even though it failed, said Stephen Ubl, head of the Advanced Medical Technology Association, the device industry's leading trade group. He, like Paulsen, thinks the device tax repeal benefited from the attention.

But the public will also focus on the shutdown and why the device industry was singled out among all the health-care-related businesses being asked to help pay for Obamacare, said congressional expert Norman Ornstein of the American Enterprise Institute.

"Keeping the government shut unless you bail out the medical device industry is not necessarily good news for the industry," Ornstein said.

Associating the device tax repeal with the government shutdown or potential default "was not a savvy move," said Democratic Rep. Keith Ellison, who represents Minneapolis. "The industry should have actually discouraged that."

At a minimum, Ellison said, proponents of the tax's repeal will have to offer a clear alternative for the $30 billion that will be lost over 10 years if the device tax is eliminated. A new proposal to replace the device tax by recalculating pensions may be too confusing, he added.

Paul Van de Water, an economist who studies health issues at the Center on Budget and Policy Priorities, says the device industry has exaggerated the effects of the tax.

The tax applies to foreign-made medical devices imported to the U.S., as well as to American-made devices sold in this country, Van de Water said, but it does not apply to American-made devices sold abroad. An AdvaMed-sponsored study "assumed that the tax would reduce the competitiveness of U.S. firms with foreign firms. That's absolutely false."

Most analysts, including Van de Water, agree that paying the tax could be a challenge for some smaller companies with narrow profit margins, but not for major corporations. Fridley-based Medtronic Inc., the country's largest devicemaker, believes the tax will cost the company $120 million in fiscal 2014, which is less than one percent of its $16.6 billion in net sales in fiscal 2013.

A 2012 report by Roth Capital Partners said the new patient market would be small because most medical device recipients are in their 60s or 70s and already receive devices paid for by Medicare. Only 2 percent of the uninsured Americans covered by Obamacare are over 65, Roth's researchers said.

However, from 2000 to 2010, knee, hip and pacemaker implants grew at far greater percentages for patients ages 18 to 64 than for those over 65, according to data from the U.S. Agency for Health Care Quality and Research.

In an April 2013 report titled "Health Care Coverage Expansion a Shot in the Arm for Med Tech," Wells Fargo Securities predicted an industrywide sales increase of 3.6 percent from 2012 to 2022. "We believe this will be sufficient to offset the 2.3 percent med-tech tax," the authors concluded.

Sign-ups for expanded health insurance under the Affordable Care Act began Oct. 1, and the effort to register people online has been beset with website problems. Determining their economic impact on medical device makers will be little more than speculation for months, if not years, experts say.

In the meantime, Kettl offered a political observation that he believes will be a major factor as Congress debates the tax's future.