Fix, Don’t Nix

Edition: January 2013 - Vol 21 Number 01
Article#: 4155
Author: Ted Almon

Our industry should have a serious discussion about the impending tax on medical devices, which is an important funding source of the Affordable Care Act. I agree that the proposed method of implementing the levy is flawed and is likely to create unintended consequences. I don’t agree our industry should simply call for repeal of the tax without proposing a specific solution as to where the roughly $20 billion shortfall it would cause should come from.

Reform of our rapidly disintegrating healthcare system is far more important than any individual firm or industry sector. A position advocating outright repeal creates a win or lose situation that we are likely to lose and with it, the chance to make critical improvements. I think working together on a compromise solution makes more sense.

The graver threat

Right now, the growing masses of uninsured pose a far more grave threat than this tax. In a very real sense, they are undermining the economic stability of our common customer base, in particular the community hospitals. Using our small but otherwise typical home state as an example from which to extrapolate the scale of the problem, Rhode Island is currently operating with about 20 percent of the hospitals in receivership (a form of bankruptcy), with another 20 percent that are technically insolvent, according to our own credit analysis. In several recent quarters, every single hospital in the state operated at a deficit. The problem? Our hospitals are being crushed by “uncompensated care,” an unsustainable burden that has been consistently growing for years now. Allowed to continue unabated, we are most certainly headed for a fiscal calamity far greater than the device tax could pose.

So, assuming we should seek a negotiated solution, it makes sense to start with the intent of the law of which the tax is part. Whether you call it PPACA, the ACA, or Obamacare no longer matters. The principal intent of the law was to expand health coverage to as many of the now over 50 million citizens who are uninsured as is reasonably possible. Naturally, this will cost money, but having about 30 million new paying customers for the healthcare system will also produce a windfall for some players in the industry.

The intent of the act was to offset that windfall in various ways to fund the coverage expansion. That, stated most simply, was the purpose of not only the tax, but various other cuts to insurers and providers who might also have benefitted. These groups, in turn, sat down with drafters of the law and negotiated these deals. The 2.3 percent figure is obviously not an arbitrary number. It is someone’s approximation of the value of the windfall to our industry as a whole. It is not valid on a company by company basis.

Windfall profit tax?

Some in the industry have questioned whether any “windfall” will actually result from expanded coverage. One solution then might be to replace the excise tax on sales with a windfall profit tax, or levy on any actual increases in profit that occur starting in 2013. This surtax would presumably have to be at a much higher marginal rate, but it would only affect those who benefit and spare those who couldn’t afford it, such as smaller and less profitable firms as well as startups.

The point here, really, is that if you look at the device/supply industry as a whole, the tax is a reasonable contribution to the sustainability of the system from which we all benefit. It might need to be more progressive, and probably based upon net income rather than top line sales, but there are relatively simple solutions to the perceived hardships we currently decry. Those in the business who consider themselves politically conservative should also know that such targeted taxes are in fact a compromise effort meant to sustain the free enterprise nature of our private system – the most likely alternative being a fully government-funded program, as is most common in other developed nations.

So my call today is for our industry to reconsider calling for outright repeal of the medical device tax. My fear is, it will be perceived outside our industry as greedy and could prove futile if it draws the focus of reinvigorated reform advocates. Instead, let us promote a more productive discussion of how it could be more fairly structured as a means of preserving the healthcare infrastructure of which we are all part. The continued success, indeed the very existence, of all our businesses depends upon the success of meaningful reform of the system as a whole. Let’s not be seen as undermining that legitimate effort.


Editor’s note: Ted Almon is president and CEO of Claflin Co. an independent medical distributor in Warwick, R.I. He is a past chairman of HIDA, presently serves on the HIDA Advocacy Council, and is a past member of the MDSI editorial advisory board. He was inducted into the Medical Distribution Hall of Fame in 2012. He is an active participant in the healthcare reform debate, and writes and speaks frequently on the subject. Opinions and views expressed here are his own and do not represent the positions of MDSI, HIDA or any other organization.