Why Is The Medical Device Tax Taking Center Stage?

Oct 4, 2013
Originally published on October 4, 2013 4:43 pm

Moderate Republican lawmakers say they have found a way to end the government shutdown — a proposal they say President Obama will agree to.

The bill would fund the government for another year, while also taking aim at the Affordable Care Act by repealing the medical device tax that helps pay for health care reform.

Noam Levey, national health care reporter for the Los Angeles Times, tells Here & Now that most of the major medical device manufacturers are in states where Democrats are in power.

“Democrats have joined Republicans to support efforts to repeal this tax,” he says.


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Well, yesterday, we heard on the show from a moderate Republican congressman who said that the key to reopening the government could be repealing the medical device tax that helps pay for the Affordable Care Act. So what would that mean for medical device makers and for the health care law? Joining us with answers is L.A. Times national health care reporter Noam Levey, welcome.

NOAM LEVEY: Thank you.

HOBSON: Well, first of all, just tell us what the medical device tax is.

LEVEY: So, starting this year, medical device makers - who make everything from surgical gloves to CT scans - will be subject to a 2.3 percent tax on sales. And it's important to understand that this tax is not on consumer products like Band-Aids or eyeglasses, for example, but for - or even wheelchairs - but for these products that usually are used by hospitals, by medical offices, critical to the delivery of health care. And...

HOBSON: And we're talking about what kinds of things, then?

LEVEY: It's basic things like gauze and surgical gloves that are used in hospitals. It's very complex, artificial valves, for example, in hearts, scanners, other very complex diagnostic equipment that, you know, is integral to the delivery of health care in this country.

HOBSON: And this is just a 2.3 percent tax on these devices.

LEVEY: Correct.

HOBSON: So what's the big deal?

LEVEY: Well, like any industry, device makers don't particularly like the fact that their products are being taxed, and they have claimed that if this tax goes into effect, it will cause them to lose jobs, to ship manufacturing overseas, and will otherwise hurt, you know, what is a $100 billion industry in this country, and one that has generated quite a lot of innovation over the years.

HOBSON: And you've been reporting on this. How much of that is just bluster, and how much of it is real, that this would have a big impact on their bottom line?

LEVEY: Well, it appears that a lot of it is bluster. The important thing to understand about the way the tax is structured is that it's on sales in this country. So we don't anticipate that hospitals are going to stop buying surgical gloves, for example, or that they're going to stop buying CAT scanners.

And even if manufacturing is moved overseas, those products would still be subject to a tax when they come into the United States. So there's some question about whether or not the impact on the industry will be as large as the industry claims.

Now, it is important to note, of course, that anytime the government imposes a tax on a business sector, any business sector, most businesses pass along those costs to consumers in one way or another. So the argument could be made, I think, that if you're trying to control overall health care spending, if you impose a new tax, that's probably not going to contribute to that broader effort.

HOBSON: And we should note that this is all a big part of raising money to pay for other parts of the Affordable Care Act. This medical device tax was projected to raise $30 billion in the next decade.

LEVEY: That's right, and when the Affordable Care Act was written, three-and-half, four years ago, the authors of the law - including the Obama administration - were looking for ways to ensure that the law didn't increase the deficit. And so they imposed some new taxes in the law, and they also sought contributions from various sectors of the health care industry, the thinking being that if the federal government was going to pay to provide health insurance to tens of millions of currently uninsured Americans, that would essentially deliver a lot of new paying customers to hospitals, to drug makers, to insurance companies and to device makers.

HOBSON: So tell us about the opposition, because it's not just from one side of the aisle. This is coming from both Republicans and Democrats, some of them in states with big medical device makers, so maybe a lot of money at stake for them. But tell us about the opposition.

LEVEY: Well, this is a little bit of a Washington story. I mean, nobody who - none of the industries that were hit with these taxes and contributions were particularly happy about them, so you could ask: Why is it the device makers, of all of the stakeholders here, how do they get the ear of Congress at a time when the government's shut down, and so forth?

And, as you mentioned, they have a very strong constituency, a political constituency, because the largest device makers in America happen to be located in states that have Democratic representatives. Medtronic is in Minnesota. Boston Scientific is in Massachusetts. Johnson & Johnson is in New Jersey.

So Democrats have joined Republicans in the past year to support efforts to repeal this tax, whereas there's been a lot less interest on the Democratic side of the aisle, for example, in repealing the tax on insurance companies, which don't have the same kind of political support.

HOBSON: Are you surprised that this has become one of the crucial elements of potentially ending a government shutdown? We spoke with a Republican congressman yesterday who says if this could be put in, if they could repeal this tax, maybe the government could reopen.

LEVEY: It is a little bit surprising, but this is a large industry, but it's certainly not as big or as important to the health care sector as some others. But the weird way that Washington works means that sometimes there's a strange confluence of interests here. Republicans are looking for kind of any way to basically kneecap the Affordable Care Act. And as we talked about earlier, Democrats have an interest in protecting industries in their home states.

So this may prove to be something of the right bill at the right time. I should note that both the White House and the Senate Democratic leadership - so far, at least - has said no go on repealing this tax right now. They don't want any part of what is clearly an effort by Republicans at this point to just hobble the law.

HOBSON: Noam Levey is national health care reporter for the Los Angeles Times. He spoke with us from Washington. Noam Levey, thanks so much.

LEVEY: My pleasure.


And, by the way, we're following weather news: the storm Karen, headed for the Gulf Coast. A foot of snow has fallen today in South Dakota's Black Hills, blizzard conditions there. We'll keep an eye on all of it. Back in a minute, HERE AND NOW. Transcript provided by NPR, Copyright NPR.