Expect Higher Medical Costs, Less Research Because of Device Tax

Expect Higher Medical Costs, Less Research Because of Device Tax
April 17, 2013

Richard Morrison

Richard Morrison is manager of communications at the Tax Foundation. (read full bio)

The federal medical device tax, which went into force on January 1 of this year, will have an adverse effect on the medical device industry, consumers, and the economy, according to a new analysis by the Tax Foundation.

The 2.3 percent excise tax on the manufacturers of medical devices is part of the Patient Protection and Affordable Care Act, which was signed into law by President Obama in 2010. The provision is predicted to raise $3.2 billion dollars each year on average for the next 10 years.

Higher Costs

“This tax will result in higher health care costs, which undermines the objective of the Affordable Care Act,” said Tax Foundation economist Kyle Pomerleau. “It is also likely that this tax will adversely affect employment, innovation, and competition in the medical device industry, especially among small firms with slim margins.”

In the short term, manufacturers will try to pass the tax on to consumers in the form of higher prices. In fact, earlier this year, some hospitals expressed alarm that medical device manufacturers are beginning to bill them for the cost of the excise tax.

Less Research

Over the long term, however, the purchasing power of hospitals and health care organizations will reduce the ability of manufacturers to pass along the cost of the tax, likely leading to lower levels of investment in research and development and ultimately a loss of as many as 45,000 jobs nationwide, according to Pomerleau. In addition, the complexity of complying with the tax will create an additional burden on manufacturers, one that will disproportionately impact smaller companies.

“For many medical device firms, adding one more person in the tax department likely means not adding one more scientist in the R&D laboratory,” said Pomerleau.

Richard Morrison (Morrison@taxfoundation.org) is manager of communications for the Tax Foundation.

Internet Info

Tax Foundation Fiscal Fact No. 364, “The ACA Medical Device Tax: Bad Policy in Need of Repeal,” by Kyle Pomerleau: http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff364.pdf

Richard Morrison

Richard Morrison is manager of communications at the Tax Foundation. (read full bio)