The Patient Protection and Affordable Care Act – or Obamacare, as it is cordially known throughout the country – has become one of the defining issues of President Barrack Obama’s two terms at the White House, virtually managing to upset almost each of the parts involved, from the poorer Americans to medical institutes and insurance companies themselves. That’s not to say that there aren’t people with a different point of view who say it’s the most sustainable form of health care that the U.S. can possibly promote right now.
The truth, as always, is probably in-between; the worst part about Obamacare is the fact that is quite complicated in its structure. Maybe that is to be expected from a measure that tries to pacify our liberal and capitalistic foundations with a socialistic idea of offering affordable healthcare to anyone. But the thing is that in the effort to avoid displeasing one category too much, it manages to displease most of them; it’s maybe about the way funding is levied from people and entities who don’t see themselves an immediate benefit from them.
One such example is the medical device tax, which is one of the most controversial aspects of Obamacare, whose effects could change the way an entire industry functions. This is one of the more confusing parts of the Affordable Care Act, and this article will try to make it as understandable as possible to every reader, with both pro and negative aspects that its supporters and detractors alike point out. Hopefully, you’ll have your mind made up about it after this somewhat lengthy read; don’t forget, our goal is not to influence in you in jumping into one of the two sides, but merely to inform you of every important aspect so you can make a fully aware judgment on the matter afterwards.
What is the Medical Device Tax?
The Medical Device Tax has been included in the Affordable Care Act since it was enacted back in 2010, but was effectively implemented from 2013. First, to clarify the meaning of medical devices, the term refers to any apparatus, instruments and reagents and so on which are used in the medical trade; ranging from the rather expensive life support equipment to smaller objects such as scalpels.
Now, there is an entire industry behind the manufacturing of medical devices, which employs about 400.000 people and has healthy, though not insane profits. The tax is levied on the companies that activate within this industry, like medical device manufacturers, and represents a 2.3 percent tax on the sales of medical devices. This brings the IRS over $190 million monthly in tax income and is expected to raise about $29 billion in net revenue until 2023. The tax money goes into supporting other programs of the Affordable Care Act. It should also be noted that this tax rate has been negotiated down from an initial 4.6 percent proposition.
Who does it target and how does it work exactly?
As mentioned above, this tax is levied from medical device manufacturers. There are over 7.000 such manufacturers activating within the United States, and the industry employs more than 400.000 people at an average salary rate of about $58.000. It also indirectly affects a supply chain industry of about $2 million. Industry sales are estimated to be situated somewhere around $110 billion per year.
The logic behind this type of levying is that the Affordable Care Act will provide more income for the medical industry by enlarging the insurance coverage; this income will be taxed accordingly so that the budget deficit created by sustaining Obamacare programs will be covered.
Now, the tax percentage has effect on the revenues of these companies rather than the profits, meaning that 2.3 percent out of each sale goes to the IRS, regardless of whether the company has made a profit or not. This might not seem as an outstanding percentage, but keep in mind the medical device industry works in quite a clockwork manner; a complicated regulatory process must be undertaken before the company sells its products means that initial profit will come slow, and those percentages are critical especially for smaller providers.
So, by taking an example of a company which sells apparatus worth $1.000.000 in one bout, whose production cost about $900.000, we can deduce that the tax imposed by them would be $23.000. This amounts to almost a quarter of their profit, and is a common case throughout the medical device industry, as there are virtually no ways to limit production cost while also passing the regulation process.
How did medical device manufacturers respond to this?
The reception this tax got was universally negative throughout the industry. Companies have fought to obtain a repel of the tax ever since the Affordable Care Act was enacted in 2010 and even harder since its entrance into full effect in 2013. The most invoked argument was that the tax, by severely limiting profits, also hindered progress in the field.
As far as numbers are concerned, 2013 saw a 17% dip in investments of medical device companies, a trend that has been going on for half a dozen years. Also, the worst drop has been observed in beginner companies – meaning fewer risks are being taken by investors in this sector. This could indeed turn out to be a factor which stalls progress in medical equipment, as these smaller companies are the ones which have the most potential for bringing innovation, as due to the nature of the industry it is expected that large producers keep onto their tried and tested formulas.
It’s not as much a question of whether the excise tax caused this fall in investments, as that is impossible to quantify, but more likely one of whether this is the right moment to impose such a tax on the industry. Medical device companies also argue that because of the tax some of the employers that make smaller profits will have to either cut jobs – possibly around 40.000 – or raise prices to survive, none of which are ideal scenarios; still, none of these have come to pass though, so far.
Arguments pro-device tax
Of course, when it comes to supporters of the excise tax, the most compelling argument made is the $29 billion it is expected to bring to the budget – a good sum raised almost from nowhere that would help lower the strain that the complex Affordable Care Act still places. At the same time, similar excise taxes have been placed on all medical industries, as the consensus is that a larger number of insured citizens is going to boost revenue in this sector. Repelling it for the medical devices industry alone would both single it out as being privileged and possibly set a precedent for other industries to ask for a similar measure.
It’s also preferred in many people’s eyes because it would have an unnoticeable effect on consumers. Regular citizens spend on average 1% of their health expenditure on medical devices, as the bulk of the industry is directed towards hospitals and research centers. So any potential rise in prices would have little to no impact on the insured American citizen.
There are also some managers of medical device companies who argue that the effects which most manufacturers are afraid of cannot be caused by this tax, which would have a minimal impact on sales and could be offset by proper marketing. In any case, they dismiss the fear that a 2.3 percent revenue tax could lead to massive layoffs as utterly unfounded.
Arguments against the device tax
As you may have noticed, some of the pro arguments are mostly made to counter negative voices that bring out this particular excise tax as a calamity. These are the most predominant ones, but bear in mind that most of the opinions come from within the industry itself, so they are of course prone to high amounts of subjectivity.
This does not erase their status as valid concerns by any means, though. Probably the most pertinent of them all is the fact that, sales-wise, the medical devices industry functions differently than, say, the drugs industry. Medication is constantly sought after and supplied; and indeed more healthcare insurance means more drugs will be sold. But the bulk of the revenue in medical devices consists of expensive apparatus – especially imaging equipment. These are designed for long-term use in medical offices and hospitals; so an increase in the healthcare insurance pool wouldn’t really do anything to benefit this, as the same apparatus would continue being used regardless, and the cases in which demand for equipment would raise will be negligible.
Of course, we’ve already talked about how it could stifle innovation, especially by having a detrimental effect on early-level companies. While supporters of the tax would argue that it could have the opposite effect, and could actually sustain innovation by forcing companies to find more cost-effective ways of production, this is mostly unsustainable due to the very strict regulatory process.
The future of the medical device tax
The future of the tax is highly unclear due to the Republican takeover of the Senate in the last midterm; there have reportedly been several instances at which its repeal was considered. Strong cases are made on both sides though; and just as Obamacare is complicated in its essence, so is the decision at hand.
Repealing the tax at the pleads of an entire industry would then leave the need for those funds to be generated from elsewhere, most probably from taxing other medical industries more, which could set in motion an unprecedented chain of discontent. However, levying the tax on an industry which survives on exact calculus and predictions of income during a time when investments were already going downwards could prove to be a slow poison for it.
Well, you now know everything you need in order to form a pertinent idea of your own and stop depending on biased opinions from the mainstream media. Whether you consider this tax necessary or think it’s an abuse is up to you; truth be told, the issue is so complicated that both answers aren’t really that far away from one another.