Fiscal cliff debate may bring repeal of medical device tax

Jan. 1, 2013
On January 1, 2013, the highly controversial medical device tax will go into effect. The tax applies to manufacturers of medical devices and equals 2.3% of the manufacturer's sales.

By Lauren Burns

This article was written for on December 10, 2012 and reflects the reality of the medical device tax at the time of the fiscal cliff debate.

On January 1, 2013, the highly controversial medical device tax will go into effect. The tax applies to manufacturers of medical devices and equals 2.3% of the manufacturer's sales.

The medical device tax will affect dental laboratories as well as in-office fabrications such as chairside millings. There should be no worry that the tax will send production overseas, as the Center on Budget and Policy Priorities states that the tax applies equally to imported and domestically-produced devices. They say that the tax will provide $29 billion over the period of 2013 to 2022.

A push to repeal

Many people are upset about the tax, and there has been a heavy push to have it repealed. Representative Erik Paulsen (R-MN) has been working to repeal the tax, sponsoring H.R. 436, the Health Care Cost Reduction Act of 2012. The bill passed in the House with a vote of 270-146, but it is unlikely to go any further, and the White House has promised to veto the bill if it makes it to the President's desk.

Opponents of the tax state that the cons outweigh the pros. They say it's a job killer. Some are arguing that few companies will be able to pass some or all of the cost on to hospitals or distributors, so they have started implementing cost-cutting plans. A spokeswoman for Medtronic Inc., the nation's largest device maker, claims that the tax will cost $150 billion in 2013. Stryker Corp. said that the $130 million to $150 million that it will owe in 2013 could eat up around 30% of its research and development budget, and the company has planned to reduce its workforce by 5%, attributing this in part to the device tax. Others are claiming that the smaller companies will take the worst hits, since the tax applies to sales rather than earnings. For some companies – those just starting, for instance – 2.3% of sales could be more than their entire profit for the year.

The ADA claims that the costs on dental manufacturing will be pushed on to the patients and practices and will negatively affect access to oral health care while inhibiting the growth of small businesses in the health care sector.

Bennet Napier, the executive director of the National Association of Dental Laboratories, thinks that the tax, as applied to the dental industry specifically, is a mistake. "The excise tax was created to help pay for the implementation of health-care reform, but dentistry is not covered by insurance. So we argued that dentistry should be exempt, because there's no benefit to dentistry from this tax."

He continued, "On the medical side, maybe there is a benefit, because you'll pay the tax and see broader access to care. But with dentistry, there's no linkage to improved access to care. … Ultimately, you're creating a scenario where the consumer, who's supposed to benefit, will be picking up the tab down the line."

Gary W. Price, president and chief executive officer of the Dental Trade Alliance sent a letter to the members of the DTA after the IRS published the final rule on the implementation of the tax. He wrote, "DTA continues to fight for elimination of the tax. We continue to maintain that dental businesses will not benefit from the health reform law. For dental companies this remains an unfair tax."

What supporters say

Supporters of the medical device tax are skeptical about these negative claims. The expansion of coverage that the ACA provides will increase the number of medical procedures performed on those who were previously uninsured. Alec MacGillis of The New Republic interviewed Michael Boyle, the founder of SDI Diagnostics, a firm outside Boston with 55 employees. Boyle had a surprising opinion on the matter. As he's quoted in MacGillis's article:

"I'm never in favor of paying more tax if it can be avoided," he said. "However, it really infuriates me when politicians say that people won't hire because they have to pay a tax. If your business is growing and you need people to help sustain the growth, you're going to hire. … We're going to give you 10 more in business and take a dollar in taxes, and you mean you won't hire more people because we're going to take that one dollar? It makes no sense. It's nothing but political pandering."

According to the Center on Budget and Policy Priorities, one trade group estimates that the 10 largest medical device makers will account for 86% of sales covered. Hence, they will pay 86% of the receipts from the excise tax.

The next steps

So far, dentistry has been denied exemption from the tax. However, with the fiscal cliff debates potentially resulting in compromise from both sides, people are seeing hope. According to an article on Roll Call, Paulsen thinks there is a possibility of including repeal into the budget negotiations. There has been growing support of the repeal among Senate Democrats, including Al Franken and Elizabeth Warren. House Majority Leader Eric Cantor said on Fox News in November that he saw the budget negotiations as an opportunity to address the issue.

Though outright repeal might be unlikely, opponents are still hoping to at least delay the tax with the hope that a discussion on tax reform can continue in 2013.