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Why a tax on medical devices has stirred the budget debate

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House Republicans Monday tried to use a defibrillator to jolt Congress into averting a government shutdown—or at least repeal a tax on the heart-starting device.

A group of diehard opponents of White House's health care law, set to blow up the federal budget to try to slow or stop the new law, have apparently failed in their bid to float a possible compromise to head off a costly and disruptive government shutdown.

And it's all been about a tax projected to raise annual revenues of about 8-one-hundredths of the federal budget.

(Read more: Senate rejects House bill, shutdown looms)

House Republicans have spent months pursuing a series of unsuccessful gambits aimed at thwarting the new law. One proposal survived and landed Monday in the House's last-ditch, take-it-or-leave-it budget proposal—the repeal of a tiny corner of the new law that imposes a 2.3 percent tax on medical devices.

But by midday Monday, the Senate had stripped the provision from the bill aimed at keeping the federal government funded past midnight. House leaders had just hours to approve the "clean bill" - or let the measure die and force the government to begin furloughing workers.

Here's what the tax—and the bid to repeal it—is all about:

House Republicans are just trying to stop Obamacare because it's just too expensive. The government's broke. How can we afford it?

The only honest answer is: No one knows what the new health law will cost—or save the government. Much depends on how consumers, hospitals, health care providers, insurers and others respond to the incentives and penalties included in the law.

But the best guess from the Congressional Budget Office in a report requested by House Speaker John Boehner, R-Ohio, is that the law will save the government roughly $109 billion through 2022.

In round numbers, the math goes like this: Expanding coverage will cost about $1.7 trillion over 10 years—including subsidies for low income households, expanded Medicare coverage and tax credit for employers.

That will be offset by $506 billion in penalties from companies and individuals who don't sign up, along with other savings over same decade. The law will also save the government some $711 billion in overall health care spending, mostly savings on Medicare. And a list of other taxes, fees and revenue raisers will bring in another $569 billion over 10 years, the CBO figures.

One of those revenue raisers is the $29 billion in estimated taxes on medical devices—or about $2.9 billion a year. The 2.3 percent tax, which the government began collecting in January, covers devices like pacemakers and CT scanners. (Consumer devices like wheelchairs, eyeglasses or hearing aids aren't taxed; equipment sold outside the U.S. is also excluded.).

So why pick on medical devices?

Because if the health care law works as it's supposed to, sales of medical devices will get an added boost from the tens of millions of new patients covered by health insurance, all of whom will need care from providers and hospitals that will have to buy more devices.

If the law generates more profit for the medical device industry, the thinking goes, it can afford to help pay for the law. The added revenue boost is expected to help the $130-billion-a-year industry grow by high single digits as the law kicks in, according to a report from research firm IHS.

Among the six biggest companies in the Fortune 500, five had profit margins of roughly 15 percent or higher. So the White House figures that if the new law helps generate 15 cents in profits for every dollar spent on new devices, the industry can afford to spend 2.3 cents to help underwrite expanded coverage.

That makes sense. So why is this such a big issue?

Because the industry employs about 400,000 people—many of whom work and vote in Democratic congressional districts. Between them, the top five device makers are based in states with eight Senate Democrats, including Baxter International (Illinois), Medtronic (Minnesota), Stryker (Michigan), Becton Dickenson (New Jersey) and Boston Scientific (Massachusetts).

AdvaMed, the industry's largest trade group, has also argued that not all device makers generate Fortune 500-sized profits, and that the tax will hurt job creation, reduce investment in new medical devices and raise health care costs because some device makers will just pass along the tax cost.

Just in case those arguments didn't work, device makers have spent more than $150 million since 2008 lobbying to overturn the tax. The money was apparently well-spent. In July, 79 senators supported a resolution opposing the device tax, including 30 Democrats. A House bill to repeal the tax picked up 260 co-sponsors.

So why hasn't the tax been repealed?

Because the White House—with some justification—figures that if opponents of the Affordable Care Act succeed in picking off pieces of it, the law will quickly unravel. To answer complaints that the new law was a budget–buster, the White House added the tax as one of many offsets to cover the cost of insurance not covered by premiums paid by individuals or their employees. Start taking away those offsets and the law gets very expensive, very quickly.

More recently, both the president and Senate Majority Leader Harry Reid, D-Nev., have said they refuse to let the threat of a government shutdown become a weapon for one branch of Congress to hold the government hostage to their demands.

Reid apparently thinks he's got the votes in the Senate to stand his ground. A spokesman told The Associated Press said the Senate will reject any funding bill that includes a repeal of the device tax.

"Absolutely not," White House spokesman Jay Carney said when asked if President Barack Obama would support repeal.

So unless House Republicans back down, the government will run out of funding because of a stalemate over $2.9 billion—or about 0.08 percent of the $3.8 trillion federal budget.

—By CNBC's John W. Schoen. Follow him on Twitter @johnwschoen.

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