Medical Device Tax: Back in the News Post-King

By Gregory Curfman

Just when the Affordable Care Act (ACA) has won a second major Supreme Court victory in King v. Burwell, conservative critics of the ACA are back on the attack, this time directing their ire towards the medical device tax. Having lost the battle on subsidies, they are now focusing on the device tax as the prime target in their attempt to overturn parts of the ACA. This 2.3% excise tax levied on the medical device industry is stipulated as one of the tax provisions in the ACA. The rationale is that since the ACA provides coverage for many more people, thus bringing more business to the industry, it is reasonable to ask the industry to pay something back to support the programmatic mission of the ACA.

From the beginning, the medical device industry has strongly objected to the excise tax, claiming it will stifle innovation by taking away funds that would otherwise be used for new product research and development. For example, Dr. Thomas Stossel of Harvard Medical School, a conservative voice on health issues, recently wrote: “A 2.3 percent tax on sales can easily mean the difference between commercial success and bankruptcy: borderline profits become losses and investors flee to less risky ventures. Brute force taxes destabilize the fragile innovation ecosystem.”

Others, such as Chad Stone of the Center on Budget and Policy Priorities, have countered that there is no evidence thus far that the tax on medical devices, which went into effect in January, 2013, has had any effect on innovation: “Calls to repeal the medical device tax reflect industry special pleading, all of it based on misinformation and exaggeration. Policymakers should resist.”

Other health-care stakeholders, such as branded prescription drug manufacturers and health insurance providers, are subject to similar taxes, but unlike the medical device industry they have not raised objections to the taxes, instead choosing to capitalize on the expansion of their markets resulting from enhanced access to health insurance under the ACA.

The House has already voted to repeal the medical device tax, and a similar bill for repeal is now before the Senate. In addition to having solid Republican support, the Senate bill is also co-sponsored by five Democrats, and current vote counting suggests that as many as 20 Democrats may cast their ballots in favor of the bill for repeal. President Obama would surely veto the bill if it passes, and an override of his veto would require a 2/3 majority vote in both chambers. The House vote for repeal of 240-120 is one vote short of a veto override, but it is worthy of note that several Republicans were not present and did not vote on the repeal bill. Thus, at least theoretically, the Senate version of the repeal bill could pass and a veto override may be possible.

Is there a “right” answer to the polarized views of the medical device tax? On the one hand, if other industries are taxed by the ACA, in the spirit of fairness why should the medical device industry be exempt? Should there be medical-device exceptionalism? On the other hand, research and development around medical devices is quite expensive and financially risky, and the community is in great need of innovative medical devices to improve overall health and wellbeing. So perhaps, some would argue, there is a rationale for exempting the device industry from this form of taxation.

It is noteworthy that the medical device industry already receives special dispensation under the law. In the Medical Device Amendments of 1976, which first established the FDA’s authority to develop a framework for the regulation of medical devices, there is a preemption clause that protects device manufacturers against product liability lawsuits originating in state courts. The preemption clause applies when devices were approved by the FDA by a full premarket approval (PMA) procedure, but not by 510(k) clearance. In contrast, brand-named drug manufacturers are not protected by such a preemption clause (Wyeth v. Levine), while generic drug manufacturers are protected in some cases (PLIVA v. Mensing).

Will the medical device tax withstand the vigorous political attempts to repeal it? At the moment it looks like a close call. A compromise might involve not eliminating the tax entirely, but instead reducing it from 2.3% to a lower figure, say, for example, 1.5%. This would acknowledge the need for innovation in the medical device industry while still preserving substantial payback to support the ACA. It is not obvious, however, that either side will be interested in such a compromise, and in the end the outcome is likely hinge upon which side wins the intense political slugfest now playing out on Capitol Hill.