A Medical Device Tax Repeal Should Be Fiscally Responsible

The brand new 114th Congress is at it again. Only weeks into the term, a second fiscally irresponsible change to the Affordable Care Act (ACA) has been introduced -- a repeal of the law's 2.3 percent tax on medical devices sold in the U.S. that is expected to add roughly $25 billion to the debt over ten years.

The medical device tax was included in the ACA in order to help pay for the law's new health coverage subsidies and in part to compensate for the financial gains device companies could expect as a result of increased coverage.

Repeal of the tax, though, is one of the few ACA-related changes with bipartisan support -- an amendment to the FY 2014 Senate budget creating a deficit-neutral reserve fund for repeal passed by a 79-20 vote, with more than 30 Democrats joining every Republican in favor. Notably, this vote was different than outright repeal since the action was both non-binding and stipulated deficit-neutrality, but it indicated the support that repeal has in both parties. Yesterday, a bipartisan group of Senators introduced a repeal bill. If repeal is to happen, though, lawmakers need to make up the lost revenue.

Criticism of the tax generally focuses on the potential negative effects on the medical device industry, but there are also concerns about the economic inefficiency of selectively taxing one type of product and the Treasury's difficulty in administering the tax.

On the first claim, the nonpartisan Congressional Research Service (CRS) has said that the economic effect would be modest, resulting in output and job loss in the device industry of between 0.01 and 0.2 percent (or job losses of between 47 and 1,200 workers), and that it would have little effect on device research and innovation. Industry studies have estimated a much higher effect on jobs in the tens of thousands range. The CRS report, however, does find that "the tax is challenging to justify ... viewed from the perspective of traditional economic and tax theory."

If policymakers decide to repeal the tax, they must also offset the lost revenue. Encouragingly, some lawmakers on the repeal bandwagon such as Reps. Erik Paulsen (R-MN) and Ron Kind (D-WI) have said that they expect a bill would be offset. Offsetting is reasonable because there are so many health care and revenue options, like the ones in our PREP Plan and elsewhere, which can and should be used as offsets.

One particularly fitting policy could be to expand bundled payments for inpatient care, as a significant portion of the $25 billion ten-year savings would likely come from providers streamlining their purchases of medical devices and obtaining bulk discounts from their manufacturers. Such a policy would still generate savings from the medical device industry, but in a more efficient manner than the tax. Plenty of other options are also available, some of which are listed in the table below.

Potential Offsets for Medical Device Tax Repeal
Policy Ten-Year Savings
Memo: Repeal Medical Device Tax -$25 billion
Health Options
Expand bundled payments for inpatient care $25 billion
Reduce state Medicaid provider taxes to 4.5 percent of patient revenues $35 billion
Reduce Medicare coverage of hospital "bad debts" $30 billion
Freeze income thresholds for higher Medicare premiums after 2019 $35 billion
Encourage use of generic drugs by low-income Part D beneficiaries $25 billion
Equalize payments for similar services performed in different settings $20 billion
Increase Medicaid drug rebates $20 billion
Revenue Options
Move up "Cadillac tax" by one year to 2017 $35 billion
Eliminate tax breaks for oil and gas companies $35 billion
Increase cigarette tax by 50 cents $35 billion
Limit tax benefit of retirement accounts $30 billion
Eliminate tax exclusion for private activity bonds $30 billion
Require Social Security numbers for refundable portion of child tax credit $25 billion
Close "John Edwards/Newt Gingrich" loophole $25 billion
Eliminate the mortgage interest deduction for second homes and yachts $15 billion

Source: CBO, JCT

The apparent high priority that many members of Congress are placing on repeal of the medical device tax means that they should have no problem finding alternative policies to make up the lost revenue. Just because they favor repeal doesn't mean they should ignore the lost revenue or paper it over with gimmicks.