House CR Would Worsen the Deficit by Repealing the Medical Device Tax

As we explained this morning, the House of Representatives recently passed a continuing resolution funding the government at FY 2013 levels through mid-December. In order to garner support from enough House Republicans, the bill also contains three Affordable Care Act-related provisions – it delays implementation of the Affordable Care Act for a year, it includes a provision that delays for a year the requirement that insurance plans cover contraception, and it permanently repeals the medical device tax.

The first two provisions are quite partisan and their deficit impact is unknown. The third provision – the medical device tax repeal – has the potential for bipartisan support (it was supported in the Senate by a vote of 79 to 20, with a majority of Democrats and all Republicans supporting). However, the device tax repeal would add to the debt and should not be part of any plan to fund the government without corresponding offsets.

The tax, which originated in the ACA and went into effect this year, is a 2.3 percent tax levied on the sale of medical devices by certain manufacturers, intended to be both a revenue-raiser and a way to compensate for the increased business manufacturers would gain as a result of the additional insurance coverage (a similar levy hit insurers). Repealing the device tax would cost about $30 billion through 2023 and would add about $35 billion to the debt when one accounts for interest costs.

^Source: JCT

Already, the funding levels in the CR are almost $20 billion higher than the caps set for FY 2014, meaning that if they are not brought back down in a subsequent funding bill policymakers will be violating the post-sequester caps set by the Budget Control Act. Yet instead of using the funding debate to make the hard choices necessary to meet or ideally replace sequester, the House bill would actually add to the budget deficit. This is an unacceptable practice, and a major step in the wrong direction, fiscally.

There may be a case to be made against the medical device tax, which critics -- particularly the businesses affected, of course -- charge would hurt sales, stifle innovation, and/or cause the manufacturing of such devices to be moved overseas (although imported devices are subject to the same tax and exported ones are exempt). But any repeal of the tax must be fully offset -- and could be either in the context of tax reform or health care reform. One option might be to replace the tax with an expansion of bundled payments for inpatient care, as a sizeable portion of the savings likely would come from physicians standardizing the devices they use, thus leading to greater efficiency and lower costs.

If lawmakers would like to replace the device tax with an alternative policy, there are many ways to do so. But the conversation about funding the government should be focused on avoiding a shutdown, dealing with the sequester, and addressing our larger budgetary challenges. That means finding ways to reduce the long-term deficit, not ways to increase it.