Will the Medical Device Tax Be Repealed, Finally?

Like a recurring nightmare for medical device manufacturers, the 2.3% medical device tax may actually return in 2020.

It’s been seven years since the tax was instituted as part of the Affordable Care Act (ACA). After near widespread pushback from manufacturers, the tax was suspended from 2016 to 2019. Unless Congress acts, the tax will go back into effect on January 1, 2020.

The Medical Device Manufacturers Association (MDMA), the Advanced Medical Technology Association (AdvaMed), the Medical Imaging & Technology Alliance (MITA) and virtually every medical device manufacturer in America sent a letter to congress urging them to permanently repeal the medical device excise tax.

2.3% Tax on Every Medical Device

The medical device tax is a 2.3% levy on the sale of nearly every medical device sold in the country—from large joint implants and spine braces to pacemakers and stents to MRI machines and CT scanners.

In their letter to Congress, the orthopedic companies and their representatives in Washington wrote: “The United States is the world leader in manufacturing life-saving and life-enhancing diagnostics and treatments within an industry that is an important engine for economic growth. Unfortunately, when the medical device tax was in effect, it had an adverse impact on R&D investment and job creation, jeopardizing the U.S. position as a global leader in medical device innovation.”

Furthermore, said Jeff McCaulley, CEO of Avalign Technologies and Chairman of MDMA, “This diverse community of voices urging Congress to fully and permanently repeal the medical device tax is yet another example of the growing coalition working together to ensure this tax on innovation never returns. Having fought against the medical device tax when it was first proposed in 2009, MDMA remains committed to working with Members of Congress and all stakeholders to make sure that this disastrous policy never diverts precious resources away from the cures and therapies of tomorrow.”

Kevin Lobo, Chairman and CEO of Stryker Corporation and Chairman of AdvaMed said, “Congress needs to act now to stop a $20 billion tax on the medical technology industry from coming back at the end of the year. This tax hurts innovation and the development of future treatments and cures. American patients and health care providers are counting on our industry to help improve and save lives and this tax is an obstacle to that mission.”

Dennis Durmis, Senior Vice President Bayer Radiology, America’s Region and Chair of MITA Board of Directors chimed in saying, “We applaud the sweeping coalition of more than 600 signatories for leading the charge in urging lawmakers to repeal this economically harmful and innovation stifling tax. By making their voices heard in the halls of Congress, innovators, patients, and job creators are letting our elected leaders know that the time has come to end permanently this punitive and burdensome excise tax.”

Impact of a 2.3% Tax on Devices Survey

To put some data behind these calls for action, MDMA also released the results of survey which highlights the damage the device tax could cause to medical device industry innovation and jobs.

The survey asked over 100 medical technology companies and innovators about the impact of a 2.3% medical device tax on patient care and innovation. Eighty-two percentof respondents said that, if the tax was reinstated, they would reduce R&D, cut or freeze salaries to prepare for the tax.

“We will never fully repair the damage caused when the medical device tax was in place from 2013-2015, but we must ensure that patient care is never punished again by a policy that diverts billions of dollars in investments away from innovation,” said Jeff McCaulley. “In order to fully empower medical technology innovators to deliver the cures and therapies of tomorrow, Congress needs to once and for all put an end to the medical device tax.”

The main findings of the survey were:

• 85% of respondents would cut or freeze R&D investments to address the tax
• Of those respondents, the average cut to their R&D budget is 15.8%
• 56% of companies with revenues that responded would cut or freeze salaries for their employees as well to address the medical device tax

“At a time where there is so much division among policy makers over how to improve health care and spur innovation, the full repeal of the medical device tax is a rare example where an overwhelming, bipartisan majority in Congress agrees on what needs to be done,” added McCaulley. “This survey highlights the negative impacts a reinstatement of the medical device tax would have, and we simply cannot allow this to happen.”

According to the Department of Commerce, the last time the 2.3% tax was in place, the medical technology ecosystem lost 28,000 jobs.

The Pelosi-led House of Representatives has introduced bipartisan legislation to repeal the medical device tax and has 239 co-sponsors. The Senate has a companion bipartisan bill, with 33 co-sponsors, including 10 Democrats.

The Outside Experts Chime In

A 2.3% tax on sales would fall directly to device company pre-tax profit line. For the capital markets, that is a very big deal. It is no exaggeration to say that this tax would likely cause a re-pricing of device company equities.

Wall Street’s medical device analysts, notably the team at Wells Fargo led by Lawrence Biegelsen, checked in with Washington, DC political experts to see how likely a repeal might be.

Their conclusion, in a nutshell, is that the odds of a 2020 reinstatement are very low.

There is no active support on either side of the aisle in Congress for re-imposing this tax.

According to a recent Wells Fargo report to clients, one possible scenario is that Congress, which is facing a looming government funding deadline, will likely kick the can down the road with one or more continuing resolutions to keep the current funding programs in place.

It is certainly worth noting that Congress has a lot on its plate currently—starting with FY2021 appropriations, the U.S./Mexico/Canada trade agreement, prescription drug legislation, pension plan relief and a bunch of reauthorizations and, of course, a likely impeachment debate, trial and vote.

Bills to cut the costs of prescription drugs and ameliorate the issue of surprise billing may well, say the Wells Fargo experts, play a role in either suspending or even repealing the medical device tax.

Working in favor of a repeal, politically, is health care reform—which has taken on the status of a golden rule among congressman. If you want to be elected, pay fealty to health care reform.

One sobering note, if Congress and the president hit an impasse over funding the government, as happened once in the past, the medical device tax could be collateral damage—unlikely, say the experts.

In the meantime, MDMA, AdvaMed and MITA are taking no chances.

Here is a copy of their letter to Congress. Be sure to let them know you support their efforts.

The Open Letter to Congress on Behalf of all Medical Device Manufacturers

September 24, 2019

Dear Majority Leader McConnell, Speaker Pelosi, Minority Leader Schumer and Minority Leader McCarthy:

On behalf of the over six hundred innovators, patient groups, physicians, hospitals, venture capitalists and other stakeholders signed below representing millions of patients and hundreds of thousands medical technology jobs, we respectfully request that Congress prioritize repeal of the medical device excise tax before it causes any more harm to the innovation ecosystem. While the tax was in place from 2013 through 2015, thousands of good paying jobs were lost, research and development projects were abandoned, and patients were denied new treatments. The Senate and House have both previously passed repeal legislation with strong bipartisan majorities, and now is the time to put an end to this punishing policy before the current suspension expires on December 31, 2019.

As you know, the medical device industry is a unique American success story, both for patients and our economy. The U.S. is the world leader in manufacturing lifesaving and life enhancing treatments, and the industry is an important engine for economic growth. The industry employs more than 400,000 workers nationwide, generates approximately $25 billion in payroll, pays out salaries that are 40 percent more than the national average ($58,000 vs.$42,000) and invests nearly $10 billion in research and development (R&D) annually. The industry is fueled by innovative companies, the majority of which are small businesses with 80 percent of companies having fewer than 50 employees and 98 percent with fewer than 500 employees. Unfortunately, when the medical device tax was in effect, it had an adverse impact on research and development investment and job creation, jeopardizing the U.S. position as a global leader in medical device innovation. U.S. Department of Commerce Census Data shows that the industry lost 29,000 jobs during the three years that the tax was in effect, and recent reports suggest that a reinstatement of the tax could result in an additional loss of 21,000 jobs. If this tax is not fully repealed, it will continue to force companies to make difficult decisions on whether to invest in manufacturing operations, research and development and other important investments in communities across the U.S.

Members of Congress from both parties joined together in late 2015 to suspend the tax from 2016 through 2017 and again in 2018 to delay it through 2019. The suspension of the tax has resulted in improvements to the ecosystem in the short-term and has enabled companies to reinvest in research and development, make new hires and provide new benefits to their employees like companywide raises and increased 401(k) matches. Still, companies are holding off on long-term investments to prepare for the possible reinstatement of the tax at the end of this year. Fortunately, there continues to be overwhelming bipartisan support for full repeal of the medical device tax in Congress.

At a time when the federal government is working to promote investment in U.S. industries of the future, it is inconsistent that a tax of this magnitude is placed on the medical device industry. We must do all we can to encourage and promote research, development, investment and innovation, and we remain dedicated to working with Congress to finally repeal the medical device tax this year. We respectfully request timely action on legislation to put a permanent end to this punitive excise tax.

Sincerely,

[signed by 600 medical device companies and related stakeholders]