Editorial Board

Taxing Medical Devices Will Keep the U.S. Healthy

Every now and then, a groundswell of support pushes legislation ahead in Congress, often on the grounds that it would provide jobs, increase U.S. exports, stop companies from moving overseas and save small businesses. The members vote, the news media congratulate them for a rare show of bipartisanship, and some interest group walks off happily into the sunset.

That’s how the narrative is playing out for a rapidly advancing bill to repeal a 2.3 percent tax on the sale of medical devices. The tax, due to start in January, is part of President Barack Obama’s health-care reform law. The $116 billion medical-device industry, which makes everything from artificial limbs to advanced imaging equipment, is hoping to derail the tax with a classic lobbying and advertising campaign. It’s been very effective: The House could vote as early as Thursday to withdraw the tax. With several Democratic senators backing the measure, the Senate may follow suit.

It shouldn’t. Just about everything the medical-device industry says about the tax is either untrue or exaggerated. Lawmakers shouldn’t be so gullible, even when -- perhaps especially when -- industry lobbyists produce studies seeming to back their claims.

Moving Offshore

Sure enough, the Advanced Medical Technology Association, or AdvaMed, financed one such study. It concludes the tax would push manufacturers to move offshore, causing the loss of 43,000 U.S. jobs. An by Bloomberg Government, however, says the study’s assumptions “conflict with economic research, overstate companies’ incentives to move jobs offshore, and ignore the positive effect of new demand” created by the health-care reform law.

The AdvaMed study cites no evidence for the job-loss claim. Even if it is an educated guess, it still makes no sense -- unless device makers plan to abandon the world’s most lucrative health-care market. The tax covers all devices sold in the U.S., no matter where they are made. Devices sold outside the U.S. won’t be taxed. The tax, then, creates exactly zero incentive to move jobs offshore.

Then there’s the claim that the levy will be passed to consumers, causing health-care costs to rise and demand for devices to fall. Industry sales will decline by as much as $6.7 billion, the AdvaMed study says. But as any health-care economist will tell you, the medical market doesn’t behave like most other markets. It’s inelastic: When prices go up, demand falls by only a fraction. Mathematica Policy Research has found that only a 2 percent drop in demand results from a 10 percent increase in price. The AdvaMed study, by assuming far higher effects, is off by as much as a factor of 10.

Health-care reform may have the opposite effect than the industry claims. It extends coverage to 33 million more Americans. Why wouldn’t that lift demand for medical devices? The industry says it won’t because older patients, who buy a disproportionate share of medical devices, are already insured under Medicare. What’s more, the newly covered who were too poor to purchase insurance were being treated already in emergency rooms.

This ignores that the expansion of health coverage will increase the number of elective medical procedures performed on those who were previously uninsured and, in turn, their purchase of medical devices. They might not buy artificial hips; they almost certainly will require tests, scans and outpatient surgery.

Harm Innovation

The industry next alleges that the tax will harm innovation as device makers stint on research to pay the levy. This is unlikely. The health-care reform law promotes innovation by calling for more cost-effective ways of delivering care. Analysts at PricewaterhouseCoopers believe that government pressure to shrink health-care costs could force the U.S. and other developed nations to make greater use of technology to achieve better results at lower cost.

Another fallacy is that the tax unfairly singles out the medical-device industry. Not so. Congress designed the law so it wouldn’t add to the budget deficit. To cover those 33 million uninsured Americans, health-care reform taxes the industries that will most benefit: hospitals, home health agencies, clinical labs, insurers, pharmaceutical companies and, yes, medical-device makers.

The industry’s last refuge is a claim that the tax will hurt small businesses. On close examination, this doesn’t ring true, either. A handful of large companies accounts for most of the industry’s revenue. The 10 largest medical device makers probably account for 86 percent of sales and therefore will pay 86 percent of the tax.

Repealing the tax would cost almost $30 billion over 10 years and undermine the implicit bargain in the law: In exchange for millions of new customers, health-care companies agreed to fund the cost. Repeal would open the gates to other health sectors seeking to renege on that deal.

The lawmakers most actively pushing repeal are also the ones who are most dependent on the industry’s campaign contributions. They come from California, Indiana, Massachusetts, Minnesota, Pennsylvania and Utah -- the states where the device industry has the largest presence.

Campaign filings show that employees of pharmaceutical and health products companies were the single-biggest donors to Representative Erik Paulsen of Minnesota, who is the main sponsor of the repeal measure and whose state is home to Medtronic Inc. and St. Jude Medical Inc. Filings by those working closely with him -- Republican Representatives Todd Rokita of Indiana and Brian Bilbray of California, and Democrat Jason Altmire of Pennsylvania -- show that health professionals, pharmaceutical manufacturers and health products companies were among their top five sources of campaign money.

In the Senate, Republican Orrin Hatch of Utah, facing a June 26 primary, took in $630,000 from drug and device makers this cycle. Even Elizabeth Warren, the liberal icon who took on Wall Street and is now running for a U.S. Senate seat in Massachusetts, home of Boston Scientific Corp., favors repealing the tax. Health-care providers gave Warren about $102,000, the No. 2 source of her campaign funds.

Congress may well withdraw the medical-device tax. If it does, it won’t be because the industry mustered a strong economic case. It will be because it’s too easy to pull the wool over lawmakers’ eyes.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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