Medical Device Tax

Christopher Flavelle

The trade association for medical device makers such as Abbott Laboratories and Medtronic says a 2.3 percent excise tax on their products designed to help pay for the health-care overhaul will tank sales and push employment overseas. An industry-commissioned study concluded that “under reasonable assumptions,” the tax would cost more than 43,000 U.S. jobs and shave as much as $6.7 billion off annual revenue of $116 billion.

A Bloomberg Government analysis finds the study is not credible. Its assumptions are flawed, in part because it exaggerates the degree to which spending on health is affected by price increases.

The tax, scheduled to go into effect in January 2013, covers items ranging from heart stents to artificial hips and is projected to raise $20 billion this decade to help pay the $1.5 trillion bill for expanding health coverage to the uninsured. The device industry’s case against the levy was published last September by the Advanced Medical Technology Association, or AdvaMed, a Washington-based trade group. The findings have been cited by Republicans in Congress as a reason to repeal the levy. Representative Erik Paulsen of Minnesota, home to Medtronic, the world’s largest maker of heart-rhythm devices, has introduced a bill to do that; it has 229 co-sponsors, including eight Democrats.

Yet AdvaMed’s “reasonable assumptions” conflict with economic research, overstate companies’ incentives to move jobs offshore, and ignore the positive effect of new demand created by the law.

The first assumption was that, if device makers passed part of the tax on to consumers, the resulting price increase could lead to an equal or greater percentage decrease in sales — what economists would call elastic demand. Yet economic research shows that health-related spending is relatively inelastic: When prices go up, demand falls by only a fraction as much. A 2006 review of the economic literature by Mathematica Policy Research found an average elasticity of 0.2, meaning a 2 percent drop in demand for every 10 percent increase in price.

The industry study presented a much higher range of elasticity of demand, anywhere from 0.5 to 5. Bloomberg Government concludes that AdvaMed’s estimates may overstate the revenue impact of the tax by up to a factor of 10. Using AdvaMed’s lowest elasticity scenario, which is still higher than the economic literature suggests, the tax would trim revenue by $670 million, or about half of one percent of the industry’s 2009 revenue.

The AdvaMed study also assumed the tax would create an incentive for device makers to shift their operations offshore, and posited, without citing evidence, that 10 percent of all U.S. jobs in the industry would flee. Yet under the new law, the tax will apply to all covered products — dialysis machines, pacemakers, heart monitors, and the like — sold in the U.S., regardless of where they are manufactured. Devices made in the U.S. for export are exempted from the tax. That means U.S. companies selling domestically have no new incentive to move production outside the country. Finally, the study assumed that none of the revenue lost by device makers would be offset by new demand, even though as many as 32 million Americans will be added to health insurers’ rolls.

David Nexon, head of policy development at AdvaMed, said in an interview, “I don’t want to defend the study methodology.” But he said its prediction of job losses was “in the ballpark” and perhaps even low. He dismissed the economic research that shows demand for health care is relatively insensitive to rising costs, saying hospitals suffering cutbacks in federal reimbursements are likely to delay some purchases and resist price increases for others. And while he agreed that the newly insured will increase demand, he said most will be young adults, not the elderly who need more health care.

The device industry isn’t the first to sound alarms over a policy it doesn’t like. In the 1980s, the Motor Vehicle Manufacturers Association said requiring airbags in cars would raise costs, reduce sales, and sacrifice as many as 200,000 jobs. That did not happen.

Economic evidence supports the notion that the tax will reduce sales of medical devices. Yet the drop is likely to be less than AdvaMed predicts and could be offset by demand from millions of new customers — adding medical device makers to the list of interest groups that have fought government action, only to find their warnings were exaggerated.


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