The Ramifications of an Unwise Tax

Even before its implementation, for which the Internal Revenue Service issued regulations last Friday, the medical device tax is already taking a heavy toll.

Late last year, a major device manufacturer, Stryker (a Healthcare Leadership Council member) announced that it was reducing its workforce by five percent to prepare for the financial hit that comes with the new 2.3 percent excise tax.  Similarly, another device maker, Covidien, said it would lay off 200 workers in the United States and move some of its production to Costa Rica and Mexico – again, to compensate for this new tax created as part of the Affordable Care Act.

So, the tally thus far is hundreds of jobs lost to a tax that hasn’t even taken effect yet.  The question is, how much more damage needs to be done before Congress takes corrective action.

The logic behind the medical device tax – which is a 2.3 percent tax on revenues, not profits – has always been severely flawed.  Device manufacturers, tax proponents said, would not be hurt because the money lost to increased taxes would be recouped from the millions of additional Americans acquiring health insurance when health reform takes full effect in 2014 and a commensurate increase in health services utilization.

That argument, though, doesn’t hold up against even casual scrutiny.  The vast majority of newly insured citizens will be the young, healthy ‘invincibles’ who have heretofore elected to bypass health coverage.  From this population group, there won’t be a heavy demand for coronary stents or artificial hips.  In fact, most medical devices are used in acute care settings, where health providers are already required to provide care for the uninsured. 

There is hope on the horizon.  Representative Erik Paulsen (R-MN) has gained over 225 cosponsors – a majority of the House of Representatives – for his legislation to repeal the device tax, and he has indicated that he has the word of the congressional leadership that his measure will be brought to a vote early this year.

The Paulsen bill should be enacted by the House, and the Senate should swiftly follow suit, before more jobs are lost to a tax that doesn’t even possess an acceptable rationale.