Why are we fighting the Medical Device Excise Tax?

“No law is sufficiently convenient to all.”

“Let the bears pay the bear tax. I’ll pay the Homer tax.”

For the past several years, the American Association of Orthodontists (AAO) Political Action Committe (PAC) has lobbied for the repeal of the Medical Device Excise Tax (MDET), a 2.3% excise tax levied on medical device manufacturers that was introduced along with a myriad of other tax provisions to help fund the Affordable Care Act (ACA). On December 18, 2015, these efforts bore fruit when Congress voted to enact a 2-year suspension of the tax. I lobbied for this in 2012, when, as a dental student, I traveled to Washington, DC, and enthusiastically participated in the American Student Dental Association’s National Lobby Day. Yet while I hear echoes of our talking points from that day in the arguments made by the AAO, the American Dental Association, and its sister organizations for the MDET’s repeal, I am no longer persuaded by them. After weighing the possible negative repercussions of the tax increase with the pros of the program that it was enacted to fund, my judgment is now that the AAO should reverse its position on this issue and halt its lobbying efforts to have the tax repealed. I fear that if it does not, it risks losing credibility in the eyes of a public whose mandate it is to support. To support this view, I first want to vet arguments presented by the AAO in support of its position, as outlined in its publication “2016 AAO Legislative Priorities.” Next, I want to discuss the context of this small increase against the backdrop of much larger reductions in taxes over the past 15 years. Finally, I want to consider the potential consequences if the MDET were to be permanently repealed.

I begin with the AAO’s claim that “keeping the medical device excise tax will impose higher consumer cost while reducing American innovation and employment in the critical field of medical technology.” It is the unfortunate truth that the cost of this tax has been passed on to health care providers by many (although not all) medical device manufacturers. Is this 2.3% excise tax so burdensome that it justifies the manufacturers’ decision to avoid paying their fair share of health care reform? Consider that the ACA levied new taxes specifically on industries that would profit from the expansion of health insurance. Thus, new levies were imposed on nearly every facet of the health care industry, including hospitals, pharmaceutical companies, the insurance industry, and medical device manufacturers and importers. There is nothing notable or disproportionate about the magnitude of the MDET in relation to the taxes now being paid by these other industries, nor is there any reason why it should be singled out as particularly burdensome. It was therefore audacious (although perhaps not surprising) that several players in the medical devices industry responded to the MDET with bold public declarations of their intention to shift costs to health care providers by increasing the prices of their products, whereas others simply raised their prices without explicitly citing the tax. This decision to opt out of paying their share for health care reform is particularly baffling when one considers that according to a study published by Wells Fargo Securities, the ACA is projected to increase medical device sales by 3.6% in its first decade. We should not fall for the misinformation circulated by the medical device lobby that the tax will reduce “American innovation and employment.” While a full discussion of this claim is beyond the scope of this article, I simply note that these arguments did not sound plausible when they first started to be circulated by the medical device industry and, in the 3 years since the MDET’s implementation, have not been borne out by the evidence, either.

Second, the AAOPAC has declared that “small business medical providers, like the AAO members, should not be forced to choose between absorbing the cost and reducing their narrow profit margins, or passing the cost on to consumers.” They make other references to the inevitability of shifting costs to patients, saying that “the increase in oral health care costs because of the excise tax … negatively affected access to oral care.” This argument is only compelling if it ignores the other recent changes to the tax code that overwhelmingly favor businesses and high-income earners. First, beyond the fact that the potential increase in overhead costs as a result of this new tax is substantially lower than the statutory rate of 2.3%, the purchase of any medical device or material to which this tax could be applied is deductible as a business expense. This results in a substantially reduced effective rate of 1.5%. Furthermore, other changes in the tax code enacted around the same time as the ACA resulted in vastly more favorable tax treatment of deductions for office equipment. The passage of the Economic Stimulus Act of 2008 saw the Section 179 deduction limit raised from $125,000 to $250,000 as well as the introduction of a 50% “bonus” depreciation for newly acquired dental equipment. This action has been widely recognized for its potential to confer substantial tax savings on dentists, so much so that some in the Academy of Dental CPAs chose to colloquially dub it as “the dentist reinvestment act of 2008.” Imagine their reaction when, 2 years later, the limit for deductions was raised from $250,000 to $500,000, with the limit for total equipment deductions raised to $2,000,000 per year, a cap that was made permanent with the recent passage of the HIRE Act in 2015 (which also reinstated the 50% bonus depreciation, which had expired for a time). Let’s put some numbers to this: say you purchase a cone-beam computed tomography device (CBCT) for your office this year at a cost of $250,000. Since this expanded Section 179 lets you deduct this entire cost in a single year, you would save $87,500 (assuming a 35% tax bracket), making the actual cost of the CBCT $162,500 in the year of purchase. Compared with expensing the CBCT using standard depreciation over 5 years, Section 179 can amount to substantial reductions in interest payments and provide the potential to earn a return. I somehow doubt that providers are rushing to pass this tax saving on to consumers. Yet imagine the reactions of patients if they learned that you saved $87,500 because of one generous tax giveaway, yet declared that a 2.3% excise tax (which, in my example, would result in the total cost of the CBCT being $255,750) was too damaging to your bottom line to absorb. Now, it’s true that 1-time purchases of expensive equipment are relatively infrequent, compared with purchases of things to which the MDET also applies and which would not qualify for depreciation deductions (eg, archwires, brackets, bonding materials). For this, one must consider the general trend of tax rates in recent years; this brings me to my third point.

I implore the AAO to consider its stance in a broader context. Ignoring the general downward trend of tax rates that have disproportionately favored high-income earners at a time of epic inequality is unconscionable. As most members of the AAO sit comfortably in the top 5% of the income distribution, let’s inject some clarity about the general direction of other tax rates over the past decade and a half before we scoff at being asked to contribute more. The Bush tax cuts resulted in huge reductions in personal, capital gains, and dividend taxes that served to disproportionately enrich our income cohort. The American Taxpayer Relief Act of 2012 made the vast majority of the Bush tax cuts permanent, resulting in a substantial net reduction in the effective tax rates owed by most orthodontists relative to the level of taxation in the 1990s. The tax savings afforded by the plethora of rate reductions over the past 15 years must surely mitigate the relatively modest effect of the MDET.

Finally, I want to draw attention to a widely overlooked aspect of the situation. As I mentioned before, the medical device companies were one of multiple industries in the health care profession hit with new tax bills. Now imagine a situation in which the tax for just one of those industries was repealed. What could you reasonably expect to happen? There can be no doubt that this would embolden the lobbying efforts of other industries, which would feel indignant that the MDET was singled out for repeal. Intense pressure would surely be brought to bear on the politicians who voted for the MDET’s repeal. The cascading effects of repealing successive health care industry taxes would deal a substantial blow to revenues, meaning that at least some of the reforms in the ACA could not be sustained. There is no doubt that at least a few AAO members who oppose the ACA and who may therefore see its repeal in whole or in part as a positive thing. I would just say that if (while I don’t think this is the case) there is even some motive to fight the MDET so as to promote the defeat of the ACA, this position should be stated outright. Despite the controversies surrounding the ACA, most of us would agree that reform of our health care system is long overdue. Unless and until some replacement is found, breakdown of the ACA is something that none of us should want or encourage.

According to its mission statement, the AAO has a dual mandate of advocating for the interests of its members as well as “advocating for the public interest.” Inevitably, there will be times when these 2 objectives are in tension. But given the benefits to society of a health care reform bill that to date has expanded health insurance coverage to 20 million previously uninsured Americans, compared with the putative incentive effects of repealing a modest business tax for a profession overwhelmingly comprising high-income earners, what is the moral way to behave? Is it moral for a group of society’s most educated and wealthiest members to mobilize ferocious opposition to even small tax increases, using arguments that attempt to portray us to be small “ma and pa” businesses living paycheck to paycheck who are going to crumble under the foot of government oppression if the situation is not immediately remedied? Threatening politicians with passing any increases in business taxes on to our patients is pretty miserly and not at all becoming of a profession that, according to the opening paragraph of our code of ethics, is supposed to be committed “to follow high ethical standards which have the benefit of the patient as their primary goal.” It is my view that we are taking an intellectually and morally indefensible position when we should be showing greater solidarity and compassion for a society on an unsustainable course of ever-rising inequality. Divorcing tax increases from the programs they fund, as the AAO, American Dental Association, and other organizations have repeatedly done in discussions of the MDET, is a common political ploy, but one that ultimately reflects a myopic and intellectually dishonest view of the world.

I want to conclude by making it absolutely clear that I have a deep respect for the AAOPAC and for the AAO in general. There is no doubt that the AAOPAC has made and continues to make laudable efforts in effectively representing our specialty on Capitol Hill. Undoubtedly, our specialty and our society are better off for its actions. This article is not meant to accuse anyone or diminish the importance of its work.

That said, in this particular instance and on this particular issue, I am not entirely sure that the AAOPAC got it right.

I recognize that this position article will not be universally popular, and encourage comments and feedback sent to smit8477@umn.edu .

Rebuttal

I appreciate these efforts to explain the AAO’s position on the MDET. In so doing, the authors have reinforced my criticisms and unintentionally demonstrated the flawed reasoning that informs so much of this debate. Although I cannot respond to all of their claims here, there are certain points I want to make.

  • 1.

    A recent study by the Congressional Research Office concluded that output and employment in the medical device industry would fall by “no more than two-tenths of 1 percent” as a result of the MDET. Furthermore, it is important to recognize that roughly half of the industry’s output and all its exports are exempt. Warnings about the “destructive implications” of the MDET on research and job creation are not supported by evidence.

  • 2.

    The authors claim that I ignored that the MDET was “introduced along with a myriad of other tax provisions to help fund the Affordable Care Act (ACA).” My point was that a proper accounting of all the tax changes since 2001 to the present day (including the rollbacks in the fiscal cliff deal and new taxes in the ACA) shows that orthodontists have a substantially reduced tax burden compared with the 1990s.

As health care professionals, we are obligated to base our conclusions on an impartial appraisal of the evidence in deciding what is best for patients. I encourage the AAO to reflect on whether its stance on this issue violates its mandate to weigh the public good against the interests of our specialty.

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Apr 4, 2017 | Posted by in Orthodontics | Comments Off on Why are we fighting the Medical Device Excise Tax?
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