Does the medical device tax cut innovation? Maybe sometimes -- and that's the point

In the Sept. 5 issue of the New England Journal of Medicine's correspondence section, several physicians jousted over the impact of the Affordable Care Act's 2.3 percent excise tax on medical devices. I was disappointed in the focus of the argument on the tax's effect on innovation in the medical device industry.  The entire exchange missed the broader point: how much does "innovation" in medical devices actually improve health care and how much of it is rent-seeking that siphons off patient and taxpayer dollars without helping patients?

Right now, most of my readers are probably asking, "Wait, what's this medical device tax?"

Good question. Part of the negotiations behind the ACA entailed major stakeholders in the health care industry -- hospitals and provider organizations,  health insurance companies, drug companies and medical device manufacturers to contribute to cost savings as the law was implemented. Hospital associations agreed to cuts in reimbursement rates in Medicare and Medicaid payments valued at about $155 billion from 2010-2020, health insurance companies had an annual fee levied on them that works out to about $60 billion over the same decade, while drug maker agreed to levies on branded drugs of about $27 billion. The medical device industry reluctantly acceded to a 2.3 percent tax on all sales of medical devices not available on the retail market (i.e. we're taxing M.D Anderson's newest CT Scanner and not grandma's wheelchair). The tax is projected to bring in about $20 billion over the first decade of the ACA's existence and went into effect at the beginning of 2013

I'm getting all of these details out of John E. McDonough's superb Inside National Health Reform, which is a must-read for anyone who wants to understand Obamacare. You should buy this book.

OK, now back to the debate in the New England Journal of Medicine.



The original NEJM perspectives piece from the May 9 issue by Daniel Kramer and Aaron Kesselheim is a decent outline of the excise tax itself and a fair look at some of its effects. They note that the medical device industry has been fighting the tax tooth and nail since the ACA went into effect and argue the claims tax will kill innovation, cripple the medical device industry rest on untested assumptions.

In the Sept. 5 correspondence section, several physicians based in the medical devices industry struck back.  In two separate letters, A. Gregory Sorensen, a physician working as an executive with Siemen's Health care division, and Stephen J Ubl of the Advanced Medical Technology Association, an industry group argue the following five propositions:

1. The tax  has a broader effect because it also affects sales to most government and non-profit groups, sales to which usually aren't taxed

2.  expanded coverage will increase preventative care, which will decrease the need for advanced medical devices

3. Sorenson argues that his personal experience has shown the medical tax has already forced layoffs at his company and cost "hundreds" of research jobs at Siemens. Ubl argues that the tax will cost 40,000 jobs.

4. diagnostic errors are most common and dangerous so we need more advanced medical devices to avoid the errors. The tax will kill these sales

5. the tax money merely goes into general government revenues and does not expand coverage. 

With the partial exception of No.1, these are the arguments of hacks employed by the medical device industry -- misleading, irrelevant or highly questionable. Let me take them in turn:

1. This is true. But considering non-profit hospitals and government systems (the Veteran's Administration) are the biggest purchasers of medical devices, the tax would have little reach otherwise.

2. Great!  We can stop buying your overpriced screening technology and focus spending on preventative care for everyone. And you can find a useful line of work. Society wins all around.

3. This is the classic "executive blames layoffs on a regulation he doesn't like" move. Notice how details are lacking in Sorenson's case. Ubl also cites two industry-funded studies that I wouldn't touch with a 10-foot-pole.

4. Diagnostic errors are a major problem. But why should we assume that introducing even more complicated and expensive imaging equipment will limit the number of diagnostic errors instead of compounding them?

5. Bitch, please. Revenue is fungible. Have your accountant punch you in the face twice and call me in the morning. Wait --on second thought, don't call me.

I award this round to the original authors who suggest that the effect of the excise tax on medical innovation is unknown, and suggest rumors of the impending demise of the highly profitable medical device industry are greatly exaggerated.

But there's a broader assumption here that I want to challenge: Why do we take for granted that innovation in the medical device industry is the most effective way to improve the quality of health care? Heck, why are we assuming that innovation in medical devices actually improves health at all?

Take an example:  over the last decade, one of the coolest new toys in surgery is the da Vinchi, a robot that minimizes invasive surgery for any number of operations. Each robot costs about $2.5 million plus annual maintenance costs. Around 2008, area hospitals in southeastern Michigan began installing them and advertising them on television to attract patients. Every time one of the commercials would come on in Ann Arbor, my fiance, then a medical student at the University of Michigan, would react in a manner I usually reserve for political ads sponsored by the Club for Growth.

"They don't do anything to actually patient safety or health outcomes" she would spit between involuntary face-crunching spasms (It was so adorable). But because all the other hospitals in the region were buying them, UM would have to as well to keep its reputation as the "leader and best." Shannon Brownlee outlines a similar phenomenon with CT scanners ($2 million a pop) in her classic book on the U.S. health care system, Overtreated.

Brownlee's main point is that American health care suffers from two problems: First, a large portion of Americans (the uninsured) don't get enough health care treatment, while wealthy people with gold-plated insurance policies get too much -- as  evidenced by too many tests and the arms races to buy the latest equipment which actually might not do anything. At best, the over treatment is unnecessary and merely wastes money that could be spent on other things. At worst, it's actively harmful -- those CT scanners give hefty doses of radiation.

And here's the great thing about the medical device tax: by taxing sales of medical devices, it takes money from one sector that we're over-investing in (medical technology, much of which has dubious benefits). In turn, the government reinvests that $20 billion a year in a sector that we're under-investing in (getting people insurance coverage so they can get basic medical care.)

There are probably hidden pitfalls and unintended consequences, but overall taxing medical device sales to invest in expanding the insured population is a good way to reduce a deadly set of externalities in the U.S. health system.

Now why the heck did 79 senators vote to repeal it? I'll speculate a bit about that tomorrow....