Medical Device Tax: An Update

The New York Times has an article on the medical device tax, and it's truly worth a read. In my previous post about the tax, I cut the medical device industry some slack and said that they may have a case built around the concept of double taxation: that because hospitals have committed themselves to lowering their prices as a result of the ACA, the medical device industry will already feel pressure to lower their prices and a tax on top of that would be a double blow. Surprise! The industry lobbyists were being disingenuous. From the article:

The medical-device industry faces virtually no price competition. Because of confidentiality agreements that manufacturers require hospitals to sign, the prices of the devices are cloaked in secrecy. This lack of transparency impedes hospitals from sharing price information and thus knowing whether they are getting a good deal.

Even worse, manufacturers often maintain personal relationships (sometimes involving financial payments like consulting fees) with physicians who choose the medical devices that their hospitals purchase, creating a conflict of interest. Physicians often don’t even know the costs of the devices, and individual physicians often choose devices on their own, which weakens a hospital’s ability to bargain for volume discounts.

Such anticompetitive practices help generate a wide variation in the prices of medical devices — and contribute to higher prices in general.

It turns out that hospitals really don't have negotiating power when negotiating with the medical device industry. And the secretive nature of pricing may help explain why I could not find any industry estimates on the increased demand that is to be expected from 30 million possible new customers.

Here's Dean Baker with an easy mathematical example on why an industry that benefits from the ACA should help to fund the ACA:

To take a simple example, suppose a medical device company has a new screening device that it sells for $1 million. It cost $100,000 to manufacture, so it will make $900,000 from each device it sells. Before the ACA it had expected to sell 1000 copies of this screening device. That would gross it $1 billion, or $900 million in excess of its production costs.

As a result of the ACA more people will have access to health care and therefore demand for the screening device will increase. Suppose it were to rise by 10 percent. In this case the industry's revenue would rise to $1.1 billion and the profit over production costs will increase to $990 million.

Since the industry had not anticipated the ACA when it developed the screener, and had not expected these extra sales, this additional $90 million is pure gravy in the form of unanticipated profits. The logic of the tax is to take away this gravy to limit the windfall that device manufacturers enjoy as a result of the ACA.