The Medical Device Tax Lives On
For opponents of the 2.3 percent medical device tax, it looked like the repeal/replacement of the Affordable Care Act would alleviate their concerns. However, following the failure of repeal legislation that would have killed off, or delayed, the tax, the tax is on pace to be reinstated on January 1st, 2018 after a two-year gap.
Regardless of the status of the Affordable Care Act, news articles have indicated that companies and lawmakers opposed to the tax are considering pursuing a number of different options, such as adding tax delay language into other bills. Accordingly, a group of conservative action groups are pushing Congressional leaders to pursue a repeal of the tax, including preparing a letter to House speaker Paul Ryan and Senate majority leader Mitch McConnell. Further, the Advanced Medical Technology Association will be running digital and social media ads throughout this month in a number of states, hoping for tax repeal once lawmakers are back in session in September.
While it can be difficult to truly define a correlation between job performance and the medical device tax, a member survey performed by the Medical Device Manufacturers Association found that 70% of companies added jobs in 2016-2017 and R&D increased by 19% on average. On the other hand, in 2015 the Congressional Research Service found that there were no significant losses due to the tax.
According to news sources, the tax applies to hospital and physician medical equipment, but excludes many consumer medical items (eyeglasses, hearing aids, etc.).
Medical Device Excise Tax Remains in Limbo
President Trump and Paul Ryan (R-Wis) have not yet successfully replaced the Affordable Care Act with the American Health Care Act (“AHCA”). The medical device industry had been paying particular attention to the proposed reform because the 2.3% excise tax that was suspended for 2016 and 2017 is scheduled to go back into effect on January 1, 2018. The tax, which has already required the payment of billions of dollars by device manufacturers, has an outsized impact because it is assessed on gross sales, not profits.
Scott Whitaker, president & CEO of AdvaMed, told MassDevice.com that:
The fight is far from over for repeal proponents. The trade lobby plans to continue its ‘aggressive’ push to capitalize on the bipartisan support for repealing the tax. We cannot allow this tax to be reimposed on a vibrant and innovative American industry and look forward to working with Congress and the administration to end this tax once and for all.
AdvaMed plans to huddle with longtime Capitol Hill supporters of repealing the tax, including Reps. Erik Paulsen (R-Minn.), Ron Kind (D-Wis.), Sens. Orrin Hatch (R-Utah), and Amy Klobuchar (D-Minn.).
Whitaker believes there are several options to make the excise tax go away permanently, including stand-alone legislation. The Republican-controlled House has approved repeal of the excise tax four separate times in the past three years, including most recently in January 2017. The repeal “is probably going to get put into a budget reconciliation that only needs a simple majority vote in the Senate,” said Steve Parente, a professor and director of the Medical Industry Leadership Institute at the University of Minnesota. According to Parente, proponents feel that this time around, the chances of passing such a bill are much better with a Republican controlled House, Senate, and Presidency.
Despite the setbacks, the medical device industry continues to lobby both sides of the aisle to fight the excise tax. An estimated $158 million was spent on lobbying in Washington since 2012 by medical device manufactures, according to OpenSecrets.org, a nonprofit group that tracks and reports on money’s impact in politics. According to Opensecrets.org, in 2016 there was a reported $22.3 million spent on lobbying with more than $8 million have been spent on political campaigns.
Regardless of the failure of the AHCA bill, and the previous repeal legislation, news articles note that the medical device industry continues to look for supporters and ways to keep the excise tax suspended with potentially millions more being spent in lobbying this year.
Obamacare Replacement Would Repeal Medical Device Tax
Republican lawmakers recently proposed a replacement of Obamacare known as the American Health Care Act (AHCA). One provision of the proposed legislation would permanently repeal Obamacare’s 2.3% medical device excise tax. Beginning in 2013, manufacturers and importers of certain medical devices were required to pay a 2.3% tax on sales of these devices. Although the medical device tax was suspended for 2016 and 2017, it was set for reinstatement in 2018.
Introduction of the AHCA is not the first time that lawmakers and industry lobbyists have attempted to permanently repeal the medical device tax. For example, in January 2017, a group of more than 220 Representatives introduced a bill in the House of Representatives that sought to repeal the tax. In introducing that bill, Rep. Erik Paulsen (R-MN) released a statement citing improvements in the industry after temporarily suspending the tax:
We are already seeing new American jobs and increased investment in research and development as a result of the temporary suspension of this tax. With over 200 cosponsors at the start of this new session, and with overwhelming bipartisan support, permanent repeal should be a top priority for Congress.
Beyond repealing the medical device tax, the Washington Post reports that the AHCA seeks to repeal a wide array of taxes that were expected to cost insurance, medical device, and other healthcare companies billions of dollars over the next decade. Indeed, according to the Joint Committee on Taxation the 2.3% medical device tax, alone, was expected to cost these companies $20 billion over the next ten years.
Medical device industry representatives are encouraged by the prospect of a full repeal of the medical device tax. Scott Whitaker, CEO of the trade association AdvaMed stated:
Repealing the tax will provide medical technology innovators with the long-term certainty necessary to support future job growth and sustainable, cutting-edge R&D that will ultimately lead to the next generations of breakthroughs in patient care and treatment. We urge the House and Senate to act expeditiously to pass this important legislation.
Potential Repeal of Medical Device Tax
With the upcoming Republican-dominated Presidency and Congress in 2017, the Affordable Care Act, or at least parts of it, look to be on the chopping block. One of the changes that may be forthcoming is a repeal of the 2.3% medical device excise tax. While currently being suspended through 2017, under the present law the medical device tax would be reinstated in 2018.
Some producers of medical devices hope that the tax is never reinstated. Mark Throdahl, president and CEO of OrthoPediatrics Corp., a northern Indiana based orthopedic company, has said that the suspension of the tax allowed the company to hire new workers and hopes for a full repeal after the Republican transition. According to Throdahl, the tax led to a hiring freeze, and suspension of the tax allowed for them to resume “an aggressive pace of hiring and investment.” Complaints from companies like OrthoPediatrics, as well as medical device associations like AvaMed, were what led to the initial temporary suspension of the tax.
Immediately after Donald Trump‘s election victory, AvaMed President Scott Whitaker wrote in a letter to Vice President-elect Mike Pence:
The medical device tax has been a significant drag on medical innovation, and resulted in the loss or deferred creation of jobs, reduced research, spending and slowed capital expansion.
According to some lawmakers, lobbyists, and industry executives, Trump and U.S. lawmakers will likely repeal the tax which could help some of the larger medical device manufacturers such as Medtronic, Boston Scientific, St. Jude Medical, and Johnson & Johnson. Senate Republican Leader Mitch McConnell has stated that repealing the Affordable Care Act will be one of the first order of business starting in January. Senator John Barrasso (R-Wyoming) has also stated that the medical device tax would likely be repealed.
There are still a number of decisions on how to approach the repeal of the medical device tax, whether in one single bill to repeal the Affordable Care Act or a number of smaller bills removing different parts of the Act. We should be receiving more clarity once President-elect Donald Trump officially takes office.
Repeal of the tax may remove approximately $2.5 billion of annual federal funding.
Congress Suspends Medical Device Tax for 2 Years
The New York Times reports that Congress has passed a $1.8 trillion package of spending and tax cuts which includes a two-year-long suspension of the medical device tax and a permanent extension of the research and experimentation tax credit (R&D tax credit). This came after an agreement between Republican and Democratic negotiators in the House reached on Tuesday, December 15, 2015. Shortly after its passage by Congress, President Obama signed the bill into law. Under the spending and tax measure, the medical device tax will be suspended for 2 years through the end of 2017, effective January 1, 2016.
According to a press release from Rep. Erik Paulsen (R-MN), the medical device tax was initially passed in the Affordable Care Act in 2010 and took effect in 2013. The Affordable Care Act imposed 2.3% excise tax on the sale of a diverse range of medical devices including pacemakers, ventilators, and artificial hips. The medical device tax has received significant criticism for the burden it placed on new entrants to and small players in the medical device space. Discussion regarding its repeal have been ongoing for quite some time.
In a joint press release, medical device industry groups including the Medical Device Manufacturers Association (MDMA), Advanced Medical Technology Association (AdvaMed), and Medical Imaging & Technology Alliance (MITA) applauded Congress for passage of the two-year suspension of the medical device excise tax in year-end legislation.
The R&D tax credit was originally introduced in the Economic Recovery Act of 1981 and has been temporarily extended since then. According to a press release issued by the Aerospace Industries Association, the most recent R&D tax credit extension lapsed at the end of 2014. Rep. Scott Peters (D-CA) lauded the permanent extension of the R&D tax credit and pointed out that: “with the credit made permanent, innovators know they can rely on this tax incentive to invest in their ideas.”
B. Braun Executive Urges Medical Device Tax Repeal
The Morning Call reports that an executive from B. Braun Medical Inc. has urged federal lawmakers to undo a tax on medical devices. According to the report, Bruce Heugel, the chief financial officer of B. Braun, recently appeared before the Senate Committee on Finance, Subcommittee on Health Care, and testified during a hearing to request repeal of the medical device tax.
The hearing, titled “A Fresh Look at the Impact of the Medical Device Tax on Jobs, Innovation, and Patients,” addressed the possibility of a tax repeal which has enjoyed support in the House and Senate. During the hearing, Heugel stated that the tax has reduced industry profits by 29 percent, which means that companies have fewer dollars available to reinvest in new products:
We have a responsibility to our employees, shareholders and community not to end up like Bethlehem Steel,” Heugel said. “So when the new medical device tax takes away $33 million through 2015, we are forced to launch painful counter-measures.
Sen. Debbie Stabenow (D. Michigan), the sole Democrat at the hearing, asked how the device tax could be repealed in a way that would not add to the federal deficit. According to the report, Heugel responded that the Affordable Care Act has provided more care, and that the companies providing that care already are being taxed, creating more tax revenue.
Bills to Repeal Medical Device Excise Tax Introduced
Congressman Erik Paulsen (R., Minn.) and Senator Orrin Hatch (R., Utah) recently introduced bills H.R. 160 and S.149, respectively. Both bills are part of an effort to repeal the 2.3% excise tax on medical device manufacturers and importers imposed by the Affordable Care Act, commonly known as ObamaCare. Guidance from the IRS on the medical device excise tax can be found here.
Where previous attempts to modify or repeal the medical device excise tax have stalled in the Senate, the Washington Times reports that prospects of the repeal passing both houses of Congress are bolstered by the newly Republican-controlled Senate. Further, as is reflected on Congress.gov, both bills have significant bipartisan support, and, according to The Hill, efforts to gain more supporters are ongoing.
But, The Hill reports that Republican and Democrat supporters of the repeal disagree on how to offset the revenue that would be lost should the tax be repealed. Further tempering optimism for repeal of the excise tax is a January 9, 2015 report from the nonpartisan Congressional Research Service, entitled “The Medical Device Excise Tax: Economic Analysis,” which states in its summary that the effect of the tax on the medical device industry will be minor because of the relatively inelastic demand for medical services, the small tax rate, and the numerous exemptions from the tax. Contrary to industry reports on the tax that predict significant adverse effects on innovation and employment, the Congressional Research Service’s report suggests that “most of the tax will fall on consumer prices, and not on profits of medical device companies.”
H.R. 160 has been referred to the House Ways and Means Committee while S.149 has been referred to the Senate Finance Committee. Check back here for further developments on efforts to repeal the medical device excise tax.
The Medical Device Tax in the Wake of 2014 Midterm Elections
Repeal of the medical device tax has seen frequent news coverage since the tax’s enactment in 2010 as part of the Affordable Care Act. The tax, which went into effect in January, 2013, imposes a 2.3% sales tax on a range of medical devices and accessories, from pacemakers to dentures to tongue depressors. Repealing the medical device tax became a major issue during the 2013 government shutdown, but there was insufficient support to successfully repeal the tax. However, following the 2014 midterm elections – in which the Republican Party increased its majority in the House and gained a majority in the Senate – there is renewed interest in the issue.
With about 7,000 medical device companies competing in the $125 billion medical device market in the U.S. – the world’s largest – there has been no shortage of lobbying efforts. Lobbying on medical devices and related supplies increased steadily from 1998 to 2008, with about $30 million spent each year since 2008 by device makers and industry groups lobbying the Hill. Recent lobbying efforts have focused on the medical device tax and resulted in broad bipartisan support for its repeal. Eighteen Senate Democrats supported delaying the tax in December 2012. In the most recent midterm election cycle, 60% of medical device companies’ support was given to six Republican candidates while only 40% was given to four Democratic candidates. The top two recipients include Rep. Erik Paulsen (R-MN) – industry giant Medtronic is based in Minnesota – and Sen. Mitch McConnell (R-KY), who will drive the agenda in the Senate next year as the Senate leader.
The Republican-controlled House has approved repeal of the tax three times in the last two years, most recently in September 2014. The Democrat-controlled Senate also backed repeal during a series of non-binding votes on a 2013 budget resolution. Now that Republicans control both chambers, it appears that repeal may be submitted for Presidential signature early next year. Despite being opposed to past efforts to repeal the tax, President Obama may now be more willing to consider signing it: when asked after the recent elections about the Republicans’ plans to repeal the tax, the President did not rule it out.
Industry participants see a real chance of passing the repeal. J.C. Scott, chief lobbyist for the Advanced Medical Technology Association, the industry’s main lobbying group, says device makers are “cautiously optimistic” that the repeal could happen this time. Further, the nonpartisan Congressional Research Service released a report last week stating that the tax is challenging to justify.
It appears the stars may have aligned for proponents of repealing the medical device tax. Only time will tell. For now, you can find answers here from the Internal Revenue Service to frequently asked questions about the medical device excise tax.
Fighting Fire with Fire – the Medical Device Tax and Outsourcing
Since its passage as part of the Affordable Care Act in 2010, the medical device tax has been hotly debated. The 2.3% excise levied on total revenues may effectively preclude new entrants while hindering the growth of established companies. While industries have turned to outsourcing for a number of years as a way to cut costs, the medical device industry may increasingly consider outsourcing in the coming years as a means to offset the effects of this tax. While outsourcing may help U.S. medical device companies, it may adversely affect Americans currently working in this sector.
Senate’s Vote to Repeal Medical Device Tax – Form Over Function?
Despite the Senate’s recent vote to repeal the medical device tax by a margin of 79-20, Forbes reports that the vote will have little practical effect on medical device manufacturers, at least in the short term. In order to abolish the tax, the article states that the loss of potential revenue from the tax, equal to over $10 billion over 10 years, would have to be completely offset by alternative revenues. The article posits:
Is there a possibility of the medical device tax being removed (or modified) down the road? Yes there is – but that road is much more potholed and twisted than many medical device manufacturers think.
According to the article, the 2.3% excise tax on the sales price of medical devices, which was passed as part of the Affordable Care Act, currently applies to almost any FDA-registered device intended for human use. Because the tax can apply to “everything from MRIs to tongue depressors to ultrasounds to condoms,” the article notes the concern that many taxpayers may not realize that the law can directly affect them. The article discusses a number of other considerations medical device manufacturers will likely face, including whether a particular company is overpaying, the potential to limit tax liability by determining the “price” of the medical device itself (as separate from bundled services), and situations involving contract manufacturers. The full article is available here.
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