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San Diego Union-Tribune: Opinion: Medical device tax repeal needed for health, economy

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By Sara Radcliffe, Op-Ed to the San Diego Union-Tribune

Feb. 20, 2015

When the medical device tax was first proposed to help fund the Affordable Care Act (ACA), many people in government and the life sciences community expressed misgivings over its possible negative consequences. Unfortunately, those concerns have been substantiated by real-world experience. Since its implementation in 2013, this 2.3 percent excise tax has cost jobs, stifled innovation and will ultimately reduce access to lifesaving devices.

Though no doubt well-intended, the device tax is the wrong way to generate revenue. First, it’s a significant drag on the economy. AdvaMed recently surveyed a large swath of the medical device community and found — as a direct result of the tax — the vast majority of companies have slowed hiring or stopped completely.

According to the report, over the next few years, nearly 40,000 industry jobs will be lost. California will lose the most, as the sector employed nearly 75,000 people in 2013, according to the California Biomedical Industry Report. The San Diego region supports over 7,000 of these jobs. Even more troubling, device industry salaries averaged $86,000. These are high-paying jobs that should be nurtured, not destroyed.

To make matters worse, indirect employment — the people who support the device industry — will take an even greater hit, shedding around 155,000 jobs. In other words, the device tax could cost the economy nearly 200,000 jobs.

The survey also illuminates how the tax is making companies rethink their business strategies: 75 percent of respondents have shelved plans for new facilities, reduced investment in device startups or found it difficult to raise capital.

Why is the device tax such a drag on economic growth? Because the tax hits revenue, rather than profits, it has a disproportionate impact on bottom lines. This is especially troubling for small, often cash-poor, device companies. The capital these startups would spend on hiring, expansion and innovation is being diverted to cover the extra burden. These companies generate many of our most important innovations, devices that can dramatically improve health and quality-of-life.

That is one of the central ironies to the device tax. While the ACA is designed to improve health, this portion of the law is actually undermining it. Excise taxes are generally levied on alcohol, tobacco and other products the government seeks to discourage. However, the device tax hits insulin pumps, artificial joints and heart valves — products that have profound impacts on health.

The tax works against other strategic goals. The device tax encourages foreign investment, as those sales are not subject to the tax. However, in a recent report, the FDA’s Center for Devices and Radiological Health noted that one of its top priorities is helping “device developers choose the U.S. as the country of first choice for their technologies. The country of first choice is a key contributor to early patient access to high-quality, safe and effective devices.”

On a more practical level, the tax is hard to enforce and is only producing 75 percent of expected revenue. According to the Treasury Department’s Inspector General for Tax Administration, the IRS is having great difficulty identifying which companies should be paying and how much. As a result, the tax service mistakenly assessed 219 penalties for failure to pay.

Given the impact this tax is having on the economy, innovation and patients, it must be reversed. Fortunately, the issue is one area where bipartisan cooperation is possible. The debate over repealing the device tax is one in which legislators such as Senate Majority Leader Mitch McConnell, R-Ky., and Sen. Elizabeth Warren, D-Mass. — polarized on so many issues — have found common ground.

Indeed, congressional legislation to repeal the tax counts more than 270 Republican and Democratic co-sponsors. Such a strong majority, including 21 from our California delegation, should send a message to both Congress and the president that the time has come to eliminate this ill-conceived, job-killing policy. I strongly urge our leaders to enact HR 160, the Protect Medical Innovation Act. All we have to gain is better health and a stronger economy.

Radcliffe is president & CEO of California Healthcare Institute, a La Jolla-based nonprofit public policy organization which helps advance public policies that foster and promote medical innovation.

Read the op-ed at the San Diego Union-Tribune