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Home Publications Blogs Beat the Press Patents and the Arithmetic of the Medical Device Tax

Patents and the Arithmetic of the Medical Device Tax

Wednesday, 20 March 2013 04:23

The medical device industry is pushing hard to repeal a tax imposed as part of the Affordable Care Act (ACA). The NYT had an article on its massive bipartisan lobbying effort. While the piece notes in passing that, "the White House argues that demand for new devices will offset the economic impact of the tax," the piece doesn't explain what this means.

The marginal cost of producing most medical devices is very low relative to their price. The companies are in effect collecting a big premium because of their patent monopolies. The ACA meant that they would sell many more devices and therefore collect a much higher dividend from their patents, even though the amount spent on research had not changed.

To see the logic here, imagine that it costs a medical company nothing to produce a scanner that it will sell for $1 million apiece. (Again, the high price is allowing it to recover development costs.) Before the ACA it would have expected to sell 1000 scanners, netting it $1 billion. After the ACA the company can expect to sell 1100 scanners, netting it $1.1 billion.

The tax is intended to recoup this additional $100 million. While the tax hit will not be exactly offsetting to the increased profit to the industry in every case, on average this will be the case. In other words, the White House is not making a bizarre argument, they are presenting the facts. The industry is trying to pocket extra profits as a dividend from the ACA and does not want the government to tax back part, or all, of this dividend.

Comments (9)Add Comment
Doesn't go far enough
written by Chris Engel, March 20, 2013 5:16
We need to recoup far more than just the dividend they will get from more coverage/higher healthcare demand (don't forget, ACA/Obamacare is just a big fat blowjob for insurance companies and the medical industrial complex in general).

It's stories like this which show just how politically impossible it would be to sensibly regulate the patent monopolists, particularly in the healthcare industry, despite the glaring signs that it will be an ever-increasing burden on our society if we don't stand up to them.

If it's an uphill battle just to clawback the windfalls for them from ACA, then what hope is there for actually reforming their market power to benefit the people?
Real Scam For Medical Devices
written by Robert Salzberg, March 20, 2013 7:14
When I attended a seminar a couple of years ago about orthopaedic joint replacements, I learned that the real problem with medical device costs is that the medical device manufacturers had managed to get insurance companies, including Medicare and Medicaid, to bundle the price of the prosthetic in with the lump sum payment of the hospital charge for implantation.

By getting the price bundled, new types of knee and hip replacement devices that cost more cut into the profit of the hospital stay.

The single largest line item for most joint replacements is the actual medical device. Medicare negotiates better for the price of the hospital stay for joint replacement than private insurance companies but both pay around twice as much as other industrialized countries.

Surgeons love new technology so if the hospital wants to keep the surgeon's business, they must accept whatever implants the surgeons choose to use.

Not sure if this also is true for things like pacemakers, but suspect it is.
Crooks Still Have an Incentive to Steal Despite a Tax That Reduces the Take
written by Last Mover, March 20, 2013 7:25
The tax is intended to recoup this additional $100 million. While the tax hit will not be exactly offsetting to the increased profit to the industry in every case, on average this will be the case.

Market power propagandists can't even tell the difference between production and consumption anymore. First they embrace the evil "socialism" that expands market demand for medical devices, then cry foul for suppressing demand with a tax limited only to unearned gains at the margin, also claiming that "innovation" is suppressed from the supply side.

The reason the tax works is because demand is essentially inelastic. That means quantities produced and consumed don't change because of the tax. They don't change from the supply side as well because of the huge amount of economic rent still loaded into the price despite the tax.

When crooks steal free goods, the take is still free, like economic rent. Even if small amounts of it are lost during the crime, the incentive to steal remains until so much is lost it's not free anymore and starts to have an opportunity cost.

That's when the crooks are forced to reform and start paying for what they get and receiving no more than a competitive profit for what they produce. Medical device costs and prices are nowhere near this tipping point.
An Industry Hardly Worth Assaulting, Low-rated comment [Show]
written by John Packard, March 20, 2013 9:32
I fail to understand your logic that device manufacturers can expext to sell 100 more devices (annually?) under the ACA. This is completely incorrect.
@logic and @ mel
written by Jennifer , March 20, 2013 10:57
@logic:The idea is that under the ACA many more people will be in the market, therefore more devices will be sold.
The article below is a nice summary of the usefulness of the tax but to @mel as Robert Salzberg points out it's not that easy to separate the two. Also, as pointed out in this article the 10 largest medical device makers account for about 86% of sales.
And they do deserve it, not just for the inflated prices they charge but they demonstrate an incredible disregard for patient health. See Johnson and Johnson re: hip replacements and transvaginal mesh implants.

written by Tom, March 20, 2013 1:29
well, since both Boston Scientific and Medtronic stock are up about 35% and 40% since this tax took affect, I doubt they are getting hit to hard with this tax.
@Jennifer @Tom
written by John Packard, March 20, 2013 3:55
In 1978, Boston Scientific had 2 employees. There are 1000s of companies now that have the potential to grow, providing employment for thousands and life-saving technology for millions. Why punish the little guys? So that the government has more coin to provide free healthcare/services? Seems unjust to me.

Also that (opnion section) article is from last June. Speaking of "exaggerated," there are now studies projecting the device tax to cost 146,000 jobs.
written by watermelonpunch, March 20, 2013 4:45
Well, Pride Mobility in northeastern Pennsylvania has certainly NOT been creating jobs.
They've been doing nothing but laying off huge portions of their local workforce in waves for a few years now. So I wouldn't call them job creators.
You don't get to be called a "job creator" when you're reducing your workforce so much that your entire workforce lives in fear of being the victim of the next wave of layoffs for several years straight.

How not expanding the amount of customers who can get their products would help their business, I don't know. Seems a tax is a small thing compared to huge market expansion. And apparently the math seems to back this reasonable observation up.

Of course one hopes that Pride Mobility's owners & managers are not stupid enough to be supporting Gov. Tom Corbett's resistance to Medicaid expansion in PA. But who knows. I don't know how one would find out where they stand on that.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.