Earlier this year, Congress made the wise decision to once again suspend the medical device tax for two years. But this temporary reprieve doesn’t go far enough. To maintain the nation’s vibrant medical technology ecosystem, it’s time to eliminate the tax altogether and stop penalizing some of our most creative companies.
The device tax is an excise tax. These are often applied to products associated with specific behaviors, like alcohol or tobacco. In such cases, the government wants to discourage the use of the associated product to improve public health. In contrast, the device tax applies to products such as stents, artificial joints, insulin pumps and other products designed to improve health.
The medical device tax is particularly bad for patients, as it acts as a headwind against innovation, leaving companies with fewer resources to reinvest in hiring, research and development, and manufacturing. Companies can defray the tax by passing it onto hospitals and consumers, but this makes them less competitive and boosts costs in America’s already expensive health care system.
When a tax is assessed on gross sales, it’s even more onerous for small startups that have yet to make a profit. As a result, the device taxes they pay only deepen their losses, which makes it more difficult for them to conduct research and test prototypes.
The best-case scenario for the medical device tax is that it will slow the ability of medical technology firms to develop new products. The worst case? Companies aren’t able to get life-saving products to patients at all.
This tax has an even broader impact. Many stock funds and pension systems invest in medical device companies. Reduced or delayed profitability means less return for retirees. If these funds forgo investing in device companies because of diminished returns, that reduces resources to support the next round of innovation. Once again, patients suffer.
These are not theoretical harms. The device tax was in effect for three years and created an uncertain business environment for medical technology companies in California and across the nation. Many companies reduced payroll — laid people off, encouraged early retirements, delayed raises. According to the U.S. Department of Commerce, the industry lost 29,000 jobs nationwide while the tax was being levied. Medical technology companies reduced research and development spending by one-third during the first year the tax was in effect.
If you think the device tax is a nonsensical way of doing things, you’re not alone. Congress has temporarily suspended the tax twice — in 2015 and 2018 — each time for two years. Unfortunately, these breaks have only kicked the can farther down the road. In 2020, the device tax will come back, still freighted with all its baggage.
This is an important issue in California, where I work. According to the 2018 California Life Sciences Industry Report, the Golden State is home to 1,796 medical technology companies that employ 77,000 people and provide $7.3 billion in total wages. So we’re quite concerned the tax could return. But California certainly isn’t alone. There are significant medical technology hubs in Massachusetts, Indiana, New York, Oregon, and other states. Each of these could face major economic losses when the tax returns.
I recognize that the device tax raises money for the federal government, but also know it is killing jobs, slashing investment in new and established companies, and ultimately delaying patient access to novel technologies.
The time has come to eliminate this short-sighted tax once and for all. Congress has an opportunity to pass the Protect Medical Innovation Act (HR 184), which would permanently eliminate the device tax. With more than 270 bipartisan co-sponsors, and more signing on every day, it’s a bill both parties can agree on.
While some taxes are necessary, they shouldn’t hamstring an entire industry, harm the economy, or delay improvements in health care. The revenue the device tax brings in pales against the dislocations it causes the medical technology industry and ultimately patients. There are smarter ways to bring in revenue.
The time has come to get rid of the medical technology tax for good.
David Beier, J.D., is managing director of Bay City Capital and a board member of the California Life Sciences Association.