Tax hurts investment in medical device research and development

June 05, 2018

AMES, Iowa - New research shows companies cut funding for research and development in response to a tax imposed on medical devices as part of the Affordable Care Act.

Daeyong Lee, an assistant professor of human development and family studies at Iowa State University, examines how certain provisions of the federal health care reform law have affected families and firms. His latest paper, published in the journal Research Policy, analyzed the 2.3 percent excise tax imposed on medical devices in 2013. The research shows the tax significantly reduced R&D investment, sales revenue, gross margins and earnings by the following amounts:

The study, the first to look at the actual cost for manufacturers, found the tax also affected operating and marketing costs, Lee said.

In the paper, Lee explains that the federal government imposed the tax on the medical device industry because it would benefit from expanded health coverage. The tax applied to everything from needles and syringes to coronary stents, defibrillators and irradiation equipment. Certain items including hearing aids, eyeglasses and contact lenses were exempt. The medical device field is one of the top five R&D intensive industries, and Lee says a decline in investment could have long-term consequences.

"Highly advanced equipment in hospitals is a critical aspect of medical care," Lee said. "Some devices such as coronary stents require high-research investment. If medical device firms stop or reduce that investment, we won't have better equipment and devices for complicated surgeries or procedures."

Passing on the tax burden

Lee looked at different scenarios when calculating the tax effect, controlling for economic factors that might affect investment. To limit the tax impact, firms could have increased prices, passing the burden to consumers. Lee says that did not happen, likely because of the market power of large hospitals and clinics. The data for the study is specific to large customers, not individuals.

In response, medical device firms diversified their customer base and increased global market sales, which were exempt from the tax, Lee said. The findings also suggest firms significantly reduced operating costs for selling, general and administrative expenses, but not advertising and labor expenses.

Raising revenue without harming research

Congress passed an appropriations act in 2015, which included a two-year moratorium on the medical device excise tax. In January, it was extended to 2020, Lee said. Given the study findings, he says the moratorium could provide time to consider other tax options that do not target a single industry. In the paper, Lee suggests policymakers expand the tax base and include other industries, such as health insurance companies, which also have benefited from increased demand as a result of the health care reform act.

"If there is a broader tax base, the negative effects will be reduced," Lee said. "The government needs to raise revenue to cover the costs of the Affordable Care Act, but there are other ways to do it without harming a research and development intensive industry."
-end-


Iowa State University

Related Affordable Care Act Articles from Brightsurf:

Affordable Care Act key to keeping people insured amid COVID 19-related job losses
Widespread layoffs amid the COVID-19 pandemic threaten to cut off millions of people from their employer-sponsored health insurance plans.

Affordable Care Act linked to better heart failure care for minorities, yet disparities persist
Heart failure patients from underserved racial or ethnic groups who live in states that have adopted the Affordable Care Act (ACA) Medicaid Expansion are more likely to receive recommended medical care than if they live in states that did not adopt the ACA Medicaid Expansion.

Affordable Care Act led to fewer disruptions in care
Among low-income adults enrolled in Medicaid, disruptions in coverage, or churning, decreased following the Affordable Care Act (ACA).

Affordable Care Act led to improved treatment of colorectal cancer among young adults
An Affordable Care Act provision that allowed young adults to be covered under their parents' insurance led to a shift to earlier-stage diagnosis and more timely receipt of adjuvant chemotherapy among young colorectal cancer patients, according to a new American Cancer Society study.

Contacts with primary care physicians did not increase after the Affordable Care Act
At the same time the Affordable Care Act increased the number of insured Americans, analysis of health care industry data shows a continued decline in contact with primary care physician services.

The Affordable Care Act's impact on insurance coverage & treatment in patients with HIV and cancer
A recent Cancer study reveals that, for people living with both HIV and cancer (PLWHC), implementation of the Patient Protection and Affordable Care Act (ACA) improved insurance coverage, both in states that expanded Medicaid coverage and those that did not.

Head and neck cancer patients benefited from Affordable Care Act
The rate of uninsured patients with head and neck cancers was 'significantly reduced' following the implementation of the federal Patient Protection and Affordable Care Act (ACA).

Affordable Care Act slashed the uninsured rate among people with diabetes
The Affordable Care Act (ACA) provided health insurance for an estimated 1.9 million people with diabetes, according to a newly published study.

Many still uninsured after Affordable Care Act Implementation
In community health centers in Medicaid expansion states, among established patients who were uninsured prior to the Affordable Care Act, many remained uninsured after implementation of the Obama-era law.

Nonphysician practitioners absorbing more new patient requests post Affordable Care Act
The advent of the Affordable Care Act has led to millions of new patients seeking primary care.

Read More: Affordable Care Act News and Affordable Care Act Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.