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The Awful Truth About the Medical Device Tax

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The new levy on sales for device manufacturers and importers is set to raise billions, but it would also upset the lobby groups funding several lawmakers' campaigns.

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"Over the past few decades, we've enriched the labs, drug companies, medical device makers, hospital administrators and purveyors of CT scans, MRIs, canes and wheelchairs...Meanwhile...we've squeezed everyone outside the system who gets stuck with the bills."

If you read Steven Brill's 26,000-word Time Magazine cover story "Bitter Pill: Why Medical Bills Are Killing Us," you're already versed in the unregulated free-for-all that is the medical industrial complex and its detrimental toll on the American patient.

Take a 64-year-old woman who was bankrupted in the space of a three-hour, $21,000 hospital visit for suffering from nothing more than heartburn. Or a man, age 42, whose treatment plan and initial chemotherapy doses for non-Hodgkin's lymphoma ran him $84,000. Simple, in-patient lab work for another patient, performed over a few days, ended up being more expensive than the price of a new car. A lung cancer diagnosis from a Northern California medical center ran a man $348,000 -- including a $77 bill for gauze pads and niacin pills at $24 a pop.

This kind of sticker shock is what you get in an anti-competitive marketplace unbounded by transparency. Because of confidentiality agreements hospitals are required to sign with medical device manufacturers, equipment prices are kept tightly under wraps, which hamstrings hospitals from shopping around for the best deal. Personal relationships between firms and physicians (who can be awarded consulting fees) further muddy the marketplace as physicians often buy equipment on behalf of hospitals without ever knowing the price or negotiating for a volume discount.

What results is the antithesis of a free market where price-gouging is the law of the land and it's the unwilling customers -- the patients -- who end up eating the costs. This year alone the health-care industry as a whole was allowed to make an unchecked $2.8 trillion off the backs of the sick and vulnerable.

So, when the Affordable Care Act imposed a 2.3% levy on sales for device manufacturers and importers that would raise $30 billion over a decade, it seemed like a Band-Aid on the gaping wound that is our health-care system; at best, it's a sanction to help offset the costs of implementing Obamacare. The New York Times called the medical device tax a "distraction from reforms to the industry that are urgently needed to lower health care costs."

But the tax actually goes too far, say many lawmakers. Members on both sides of the aisle -- as far to the right as Sen. Mitch McConnell (R-KY) and Rep. Eric Cantor (R-VA) and as left as Sen. Al Franken (D-MN) and Sen. Elizabeth Warren (D-MA) -- have voted for its repeal. As diverse as this bunch may be politically, they all share one common denominator: a trail of money that goes from the industry to their respective campaign kitties.

And there's a lot of money to go around -- $29 million a year to be exact. That's what AdvaMed, the industry's trade association, has spent on lobbying to ensure medical device companies get out of this tax. Members of AdvaMed are the most moneyed and powerful in the business and include 3M (NYSE:MMM), Abbott Laboratories (NYSE:ABT), Johnson & Johnson (NYSE:JNJ), Kimberly-Clark (NYSE:KMB), Eli Lilly (NYSE:LLY), Pfizer (NYSE:PFE), Roche (OTCMKTS:RHHBY), Siemens (NYSE:SI) and hundreds more.

The argument being pushed by AdvaMed and its lawmaker mouthpieces against the medical device tax is that it will threaten innovation and jobs. The truth is that these firms already pay a very low effective tax rate, and some, like Abbot, take advantage of dozens of tax havens. While this new 2.3% tax will cut slightly into the massive profits the industry has enjoyed from inflated pricing, it's not nearly enough to compromise technological advancements or employment.

"Consider the device division of Johnson & Johnson, which in 2012 had an operating profit of $7.2 billion," reports The Nation. "By the company's own estimate, the device tax would amount to at most $300 million, and its investment in research and development amounts to only $1.7 billion."

Moreover, the law does nothing to oversee pricing practices or force competition among manufacturers that would not only incentivize innovation but keep the US from spending 50% more than Europe and Japan. Consulting firm McKinsey & Company found that an excess of $26 billion is levied on Medicare, insurance companies, and patients in this country every year.

Still, Congress stands behind this straw man "innovation and job killer" argument, and shamelessly so. Seventy-five House Republicans sent an urgent letter to Speaker Boehner demanding a vote for the repeal of the medical device tax. The letter was written by Ryan Strandlund, a member of AdvaMed's government affairs team.

Last February, H.R.523 - Protect Medical Innovation Act of 2013 was introduced by Erik Paulsen (R-MN) with 266 co-sponsors. Paulsen has made the bill one of his biggest priorities in Congress.

Paulsen has also collected more than $121,000 in campaign cash from the medical device industry. Other top House recipients include Ron Kind (D-WI) and Jim Matheson (D-Utah), both of whom have pushed to repeal the tax.

The congressional effort to ax the medical device levy hit an egregious low when members used it as the chief bargaining chip in the government shutdown negotiations. A group of 12 bipartisan senators, including Amy Klobuchar (D-MN) and Susan Collins (R-ME) -- making over $100,000 and $60,000, respectively from the industry -- held as ransom for reopening the government, a two-year delay in enacting the tax.

Although tax repeal advocates lost that battle, the war wages on and those fighting the tax are nowhere near surrender. Senator Klobuchar said, "We have gained enormous momentum for repeal," and budget talks about the medical device tax are "certain" to move forward in Congress.
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No positions in stocks mentioned.

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