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January 20, 2015

Daily Briefing primer: The Affordable Care Act's medical device excise tax

Daily Briefing

The medical device excise tax has become one of the most controversial provisions of the ACA and has pitted devicemakers, hospital groups, and lawmakers against one another. Here's the Daily Briefing's review of the tax's requirements and how the new GOP Congress could affect its future.

What is the medical device tax—and why is it controversial?

In order to help fund the Affordable Care Act (ACA), the law established a 2.3% tax on eligible medical device products sold in the United States by the manufacturer, producer, or importer of the device. Such devices include those primarily used by physicians and hospitals, such as CT scan machines and pacemakers.

The tax went into effect in January 2013 and is expected to generate $29 billion in federal revenue over the next decade. Companies that are subject to the tax now must file quarterly tax forms with Internal Revenue Service (IRS).

Since its passage, the tax has put medical device companies, hospital groups, and lawmakers at odds.

Specifically, devicemakers have argued that the tax could eliminate nearly 40,000 jobs in the medical device sector and discourage innovation by moving manufacturing overseas. A 2010 survey of nearly 100 medical device industry C-Suite executives found that, to offset the costs of the tax, industry leaders planned to take measures like lowering the payroll and cutting supply costs.

However, a report released in November 2014 by the nonpartisan Congressional Research Service found that the tax is unlikely to hurt devicemakers' bottom lines, reducing industry output and employment by no more than 0.2%.

More member resources on the tax

Meanwhile, hospitals have taken issue with the implementation of the tax.       

In May 2012, five hospital associations—including the Federation of American Hospitals and the American Hospital Associationsent a 10-page letter to the IRS, arguing that medical device companies must not "sidestep their ACA financial contribution by passing the tax through to their customers, including hospitals." The associations called on federal officials to "specifically prohibit devicemakers from passing on the tax by raising prices."

In March 2013, the Healthcare Supply Chain Association released a list of 48 medical device and supply companies that said they would pass on the costs associated with the tax to hospitals. The manufacturers notified hospitals that they would increase their products' prices because of the excise tax or simply add the cost of the tax to invoices.

Feds didn't make as much on the medical-device tax as they hoped

Will it get repealed?

Now that Republicans have a majority in both the House and the Senate, it is likely that they will try to once more to repeal the tax. But this time, they may be successful. 

Over the past two years, the House has voted to repeal the tax multiple times, and the Senate backed its repeal during a series of non-binding votes on a 2014 budget resolution. All votes to repeal the tax have garnered support from both Democrats and Republicans.

What the GOP's historic—and overlooked—statehouse wins mean for health care

President Obama in the past has opposed efforts to repeal the tax. But during a post-election press conference in November, he signaled that he would be willing to discuss possible repeal with lawmakers, according to the Washington Post's "Wonkblog."

However, Republicans could propose cutting funding from other parts of the ACA to account for the loss in funds brought by a repeal of the tax. Doing so could eliminate Democratic support for the repeal effort. In addition, observers say a repeal of the tax could initiate similar calls by other sectors of the health care industry to reduce financial burdens imposed by the ACA.

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