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Don't Tax Life-Saving Medical Technology 

The Senate Finance Committee is considering an aspect of the Chairman’s healthcare reform bill that has enormous implications for the future of medical innovation in America.

While many have focused on public plan vs. private plan and individual mandates, both of which are important issues, the $4 billion per year excise tax on medical technology and diagnostics

Stethescope and money
Stethescope and money

should be of equal concern to Americans. It will raise the cost of health care for patients at a time when everyone is looking to reduce health expenditures, reduce the money available for investment in new cures and treatments, and result in job losses in one of America’s most vibrant and innovative industries.

To be clear, the medical technology industry was an early supporter of comprehensive healthcare reform and remains committed to the goal of ensuring that all Americans have access to quality, affordable healthcare. Every American deserves the best that American medicine has to offer, and no patient should be denied the health care they need because they can’t afford it.

We have engaged constructively with the White House and congressional leaders throughout the process, even offering billions of dollars in scorable savings from the device industry. We also have actively supported many initiatives that in the long run could result in winners and losers in our industry and reduce the number of people needing some of our advanced technologies, but we support them because they are the right thing to do. These initiatives include comparative effectiveness research, value-based purchasing, and a new emphasis on preventive health.

Healthy Horizons -- A Special Report
Healthy Horizons -- A Special Report

To put the $4 billion annual tax into perspective, it exceeds the $3.7 billion in total venture capital funding that the industry received in 2007. It also is nearly half of the $9.6 billion in R&D that the majority of device companies invested in the same year, and it is four times what the industry raised in 2007 for IPOs. Make no mistake about it: this is real money for the industry, and its impact on medical progress and patients would be substantial.

Another aspect that makes the tax particularly onerous is that it’s layered on top of billions of dollars in direct and indirect cuts on the industry that were already in the Senate Finance Committee mark. The indirect cuts are due in large part to the fact that medical technology manufacturers are not paid directly by the government but by health care providers such as hospitals and home healthcare agencies. So when Medicare reimbursements to hospitals are cut, hospitals have no choice but to reduce discretionary spending on items such as medical devices. And with hospitals facing $155 billion in reductions over ten years, medical device companies, which comprise roughly 12% of total hospital spending, face tens of billions in reductions.

Other cuts to medical devices and diagnostics prior to the tax involve tens of billions of dollars from imaging services, clinical lab fees, and durable medical equipment (DME). Since these reductions are in addition to the $4 billion tax, many segments of the medical technology industry will suffer double taxation.

Putting aside the fairness of the tax, policymakers mush also consider if it makes sense to harm an industry that is a uniquely American success story and delivers medical miracles to patients everyday. We are an industry that continues to create high wage jobs in a troubled economy and we are one of a few remaining U.S. industries that is still a net exporter. The $4 billion excise tax works out to a surcharge of equal to $11,000 per year for every American worker employed by our industry. It makes no sense at all to enact a new, job-killing tax that will put American companies at a disadvantage compared to foreign competitors.

Medical technology is transforming the delivery of health care as we know it. Devices and diagnostics detect disease earlier than ever, better manage chronic disease, and deliver greater efficiencies to the health care system that reduce costs. Through our industry’s innovations, whether pacemakers or joint replacements, diseases are stopped from progressing, suffering is averted, lives are saved, and the cost of disease is lessened. Consider that insulin pump therapy for diabetics is estimated to save nearly $18,000 per life year. Total knee replacements save an average of $77,000 in lifetime healthcare costs. Diagnostic tests for rapid, accurate detection of heart attacks can reduce hospital costs by approximately 30%. And these savings have been achieved while medical device prices have, over the last 18 years, lagged behind the Consumer Price Index and the Medical Products Price. In so many respects, medical technology embodies healthcare reform already in action.

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We are not alone in opposing this tax. Five governors and four senators recently sent a letter to Senators Baucus and Grassley calling for the tax to be dropped. So did the U.S. Chamber of Commerce, the American College of Radiology and the Kidney Cancer Association, among dozens of other medical organizations. A Wall Street Journal editorial weighed in, too. “This new tax will eventually be passed through to patients, increasing health-care costs,” it said. “It will also harm innovation, taking a big bite out of the research and development that leads to medical advancements.”

The $4 billion per year tax on medical devices is bad public policy, bad for patients, and bad for the future of a world-leading American industry.

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Stephen J. Ubl is President and CEO of the Advanced Medical Technology Association (AdvaMed), the world's largest medical technology association.