Medical Devices Are No Sin

Repealing the medical device tax, which is a targeted and discriminatory tax, does not constitute a special interest favor. The medical device industry provides life-saving products to people who need them, and should not be imposed with what is the equivalent of sin tax. The industry currently has to pass through multiple regulatory hurdles that other industries do not. Repealing the medical device tax would therefore be a return to a more level and equitable playing field.

The Washington Post calls it a “galling” concession to “special interests.” At the Huffington Post, Wendell Potter says it is a bill “to assist businesses” and that it would be bad for just about everyone but the firms who have lobbied for it. What is it? Another bailout? Another subsidy? A loan guarantee or a targeted tax break? No. The bill in question does not privilege any particular business or industry. Instead, it would repeal the medical device tax, an excise tax that singles out and discriminates against a particular industry and its customers.

It is certainly a good thing that so many prestigious news outlets are beginning to notice the problems with government favoritism. Government-granted privilege is an enormously destructive force. It misdirects resources, impedes economic growth, and even undermines the legitimacy of business and government (in fact, one of us has said so in the Washington Post).

But it would be much better if journalists directed their ire toward actual instances of favoritism or privilege.

In this case, medical device manufacturers are not seeking any special privilege. Instead, they are asking that they and their customers be treated like every other industry. But in many ways they are not. Not every industry must pay a registration fee of $3,646 dollars to let the Food and Drug Administration know they exist. Not every industry must pay FDA user fees for the right to introduce new or to improve upon existing products. For a product that the FDA considers low-to-moderate risk, this standard user fee is $5,018. But according to Stanford researchers, the regulatory approval process is “unpredictable, inefficient, and expensive,” costing the maker of a low-to-moderate risk device another $24 million and the maker of a high-risk device another $94 million.

On top of these regulatory burdens, the Affordable Care Act, added a 2.3 percent medical device tax. Expected to raise $38 billion over 10 years, it was one of a number of revenue-raising provisions to help offset the bill’s costs.

Supporters of the tax claim that the ACA’s insurance mandates will cause more patients to purchase medical devices, raising the revenue of device makers and justifying an extra tax to offset these profits. Set aside for the moment that this is a clumsy way to make policy. Economic evidence suggests—as the nonpartisan Congressional Research Service [CRS] puts it—that “the tax will fall on consumer prices, and not on profits of medical device companies.” In other words, consumers will be left paying the price for Congress’ mistakes, not device makers. This seems precisely contrary to the original goal of the ACA, which was to increase access to "affordable" health care.

Tax theorists have long recognized that differential taxation is both inequitable and inefficient. The CRS correctly summarized the economic consensus when it asserted that “The [medical device] tax is challenging to justify. In general, tax policy is more efficient when differential excise taxes are not imposed.”

Of course, government officials often single out particular products for higher taxation when they don’t like the product. This is why there are targeted taxes on alcohol, gasoline, tobacco, gambling and other goods deemed to be “sins.” Whatever the merits of sin taxation—and in our view there aren’t many—a medical device is no sin.

Wearable and implantable health monitoring devices can stop catastrophic organ failure before it begins. Cheap genomic tests can help avoid unnecessary treatments and ward off disease. Ingestible sensors built into pills promise to help patients adhere to their treatments. And remote diagnoses and treatments promise to dramatically lower costs and improve access to care.

Are these the sorts of products that should be discouraged, singled out, and treated as sins? These products must already run the FDA’s gauntlet of regulatory requirements with periodic and expensive tolls. And device makers must already pay the long list of federal, state, and local taxes that every other firm pays. Must we compound these obstacles with yet another tax?

Repealing a targeted and discriminatory tax is no special interest favor. It is a return to a more level and equitable playing field.