On the one-year anniversary of the passage of the healthcare reform bill (March 23), conservative politicians, business organizations, and manufacturers of medical devices took the opportunity to focus on a provision in the law that calls for a 2.3 percent excise tax on medical devices to go into effect in 2013.
The regulations pertaining to implementation of the device tax are still being hammered out, but the law expressly seeks to generate revenue for the government from big companies like General Electric Co. (NYSE: GE), Siemens, and Phillips as well as smaller original equipment manufacturers.
Indeed, a broad range of products could be levied -- everything from magnetic resonance imaging machines, ultrasound systems, and radiology equipment to patient monitoring devices like glucose and blood pressure meters. These devices are composed of parts supplied by electronics companies and include integrated circuits, microprocessors, sensors, flash memory, and other components.
The medical device tax, the government says, is to help pay for healthcare reforms, and part of those reforms have to do with the cost of bringing America’s healthcare system into the modern technological age.
Since President Barack Obama took office the administration has assigned billions of dollars to accelerate the adoption of health information technology that will transfer paper-based patient records to digitized medical records. This transformation helps build momentum for high-tech medical device manufacturers to sell their product in the lucrative healthcare sector. Indeed one study reveals that the medical device market was estimated to be $94.9 billion in 2010.
Under the American Recovery and Reinvestment Act (otherwise known as the stimulus package), which includes the Health Information Technology for Economic and Clinical Health (HITECH) Act, $19.2 billion was allocated to support healthcare delivery organizations' adoption of electronic health records (EHRs) systems used for storing patient information such as lab results, medications, past medical history, and radiology reports.
Additionally, HITECH has also authorized up to $27 billion in incentive payments for providers, and $2 billion to build a national infrastructure for the adoption of EHRs. Investments are also being made in broadband development and tele-health projects.
Medical device manufactures stand to benefit from these investments as their technologies become more widely used to manage computerized patient information in the medical setting. Medical device manufactures will also make further gains when an additional 32 million Americans receive healthcare coverage under the health reform law.
While federal investment in health IT is likely to boost sales at OEMs like GE and parts suppliers such as Intel Corp. (Nasdaq: INTC) and other medical device manufacturers, that fact was brushed aside in recent harsh criticism of the tax. Indeed, support to abolish the tax, which will generate $20 billion, is gaining some traction.
In January, US Rep. Erik Paulsen (R-MN) introduced H.R. 436, the "Protect Medical Innovation Act of 2011," which aims to repeal the excise tax on medical device manufacturers. According to Paulsen, his bill was introduced in the US House of Representatives with 41 bipartisan original co-sponsors; today the bill has 110 supporters in the House. Companion legislation has also been introduced in the US Senate by Senator Orrin Hatch (R-UT).
Last week the US Chamber of Commerce voiced its support for the repeal legislation in the form of a letter from R. Bruce Josten, its executive vice president for Government Affairs who described the tax as an "onerous $20 billion excise tax on medical device manufacturers."
Josten’s letter of support to Rep. Paulsen said the tax will weaken the medical device industry's ability to create and maintain well paying jobs in the United States and hinder the development of breakthrough treatments:
This new 2.3 percent tax on virtually all medical devices beginning in 2013 will lead to increased health care costs, undercutting one of the primary goals of health care reform. Further, by driving up the cost of medical technology, the tax will undermine America’s global leadership position in product innovation, clinical research, and patient care...
Finally, the tax singles out the medical technology industry to help pay for the cost of the health care reform law. The Chamber opposes punitive taxes that target a particular industry, sector, or income group.
The president and CEO of the Medical Device Manufacturers Association (MDMA) Mark Leahey also had this to say: "MDMA and its members strongly believe that the device tax included in health care reform will harm patient care and thwart innovation and job creation at a time when we can least afford it."
I don’t have a crystal ball, and therefore cannot predict how this issue will be resolved. I do know that I was disgusted to learn last week that medical device maker General Electric wiggled its way out of paying taxes for 2010. We'll see if it can do so again.