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The benefits of repealing the medical device tax

An editorial by Wayne Winegarden

As part of the Affordable Care Act, a 2.3 percent tax on medical devices and products was passed. The tax was levied on devices such as pacemakers, advanced imaging technologies (CT, MR and ultrasound equipment), artificial joints, surgical gloves, and dental instruments. Devices that the public generally buys for individual use, such as eyeglasses, hearing aids, and wheelchairs, were explicitly exempted from the tax.

The medical device tax was never an economically sound policy. In recognition of this tax’s many flaws, both the Senate and House of Representatives have separately passed repeal legislation. While the repeal attempts have been unsuccessful, Congress has twice implemented a moratorium that suspended the tax. Passing a series of moratoriums is insufficient, however. The optimal policy permanently repeals the medical device tax.
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Taxing medical devices is unsound tax policy
Excise taxes such as the medical device tax create unwanted economic inefficiencies. Perhaps more important, the typical arguments used to justify the imposition of an excise tax do not apply to medical devices. Proponents often justify excise taxes as a means to discourage consumption of the taxed product. Regardless of this argument’s merits, it clearly does not apply to medical devices.

Take imaging technologies as the example. Imaging technologies help physicians detect diseases in their earliest stages when they are most treatable. Clearly, policy should not discourage greater use of these crucial medical technologies nor increase their price. Yet, introductory economics teaches that this is precisely the expected result from the imposition of the medical device tax.

If the medical device tax were not suspended, then an imaging device company with $10 million in revenues would have additional costs of $230,000 (the 2.3 percent medical device tax multiplied by the $10 million in gross revenues). How the company will deal with these costs is unknown. Perhaps some of these costs will be passed along to patients through higher costs for medical equipment, harming patients welfare. Or some of these costs will be absorbed by the company, which would reduce their profitability. If the costs that cannot be passed along are high enough, then the 2.3 percent tax on revenues could turn a company with minimal profits into a money loser.

The precise allocation of these costs will vary depending upon the specific price sensitivities of the patients and producers. It could be that patients bear all of the costs, producers bear all the costs, or some combination of the two. The only outcome that is not possible is that the tax does not distort the imaging technology market. Policies that lead to some combination of higher medical costs and less availability of medical technologies worsens the problems facing the U.S. healthcare system.
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