There are two significant costs to the US government for the Affordable Care Act (ACA.) The first is the cost for premium support to lower-income families and individuals. As an example, let’s use Frank, a 30 year-old man earning $15,000 per year; we would all agree that Frank would have difficulty in paying $250 per month, an estimated cost for health insurance in 2015, which would constitute approximately 20% of Frank’s pretax income. In the past, Frank would just make do without medical insurance, hoping he didn’t get sick or injured. To overcome this barrier, under the provisions of the ACA the government pays a portion of Frank’s monthly premium so he can afford health insurance. The government pays around $200 per month of Frank’s policy, and he pays the remaining $50 per month, an amount which he can afford (hence the name, The Affordable Care Act). The second large cost to the US government is something called “cost sharing,” the part of the ACA that helps Frank with his co-pays, deductibles, and maximum out-of-pocket expenditures. So, instead of Frank having a standard deductible of $3,000 per year, this item might be reduced to as little as $750 per year, another expense that Frank “shares” with the government so he can get the healthcare he needs at a cost he can afford. It doesn’t make sense for people to have an insurance policy that has such a large deductible that they still can’t afford to go to the doctor when they are sick. But as you can see, that difference between the $750 that Frank pays and the $3,000 that the insurance company is charging has to be paid by someone, and that someone is the federal government.
We can argue the numbers all day long, but this substantial piece of legislation, the ACA, did attempt to pay for itself with taxes and fees. Other costly major government expenditures such as Medicare Part D, the Bush wars, and the Bush tax cuts were enacted with neither the commensurate taxes or fees to pay for them, nor government spending cuts to balance them. Those Republicans just spend and spend and spend like there is no tomorrow! But I won’t rattle on at the risk of alienating my Republican friends and readers — any more than I usually do, anyway — because today I am focused on alienating BOTH Republicans and Democrats. So with this background in place, let’s get to today’s rant, oops, I mean, today’s musings.
A feature of the ACA that has broad consensus among politicians of both stripes to repeal is the tax on medical devices. The ACA carries a 2.3% tax on all medical devices from band aids to prosthetics to implantable defibrillators. This tax was one of several taxes and fees that Congress implemented to help the government pay for the subsidies to medical insurance costs, as illustrated in Frank’s example above. Now, much of Congress, from US Senator Elizabeth Warren, who is considered the Leftist of the Left, to Orin Hatch, the Rightest of the Right, are united in their efforts to repeal this tax on medical devices. In March of 2013, the Senate even held a “symbolic” vote — the only type of vote we actually get in this rabidly divided Congress — to repeal it. This vote was overwhelmingly popular, passing by a margin of 79-20. The ridiculously bipartisan support for this tax repeal initially amazed me. Why in the world would Congress be so adamant about repealing this “hidden tax” when there are so many other taxes that visibly and directly affect their voters? I get that the 3.8% investment tax for high income individuals only affects the “rich,” and that the increase in the Medicare payroll tax only affects high-income earners. The so-called ”Cadillac” tax on very high-cost and benefit-rich insurance policies also affects very few people. But this? How many people do you know with replacement body parts such as hips, knees, and pacemakers? At a 2.3% tax rate, that is a lot of money to offset the expenses of the ACA.
Why, indeed? When the ACA was drafted, the hospital lobby argued that hospitals would be taking a big reduction in Medicare reimbursements under the ACA, and the pharmaceutical lobby argued that the pharmaceutical companies were also taking cuts under the ACA, and both lobbies agreed that the medical device companies should share in the pain of either higher taxes or lower reimbursements. Common wisdom held that the increase in numbers of insured patients would offset both the higher taxes and lower reimbursements. The medical device companies argued that it was unfair to tax their sales; they should be taxed on their profits. I guess that’s why many of these extremely profitable medical device companies are moving their headquarters overseas — to avoid paying these taxes on their profits! But the question for us citizens remains… why does both the left and the right side of the political spectrum want to remove this tax, thereby increasing the net cost to the government of the ACA?
Did you realize there are more than 7,000 medical device companies in the United States? A large number of these companies are located in New York, Massachusetts, Minnesota and California. Medtronic, one of the largest medical device makers in the country, is currently based in Minnesota – at least until it completes its move to Ireland by the end of 2015 — and both of its Democratic senators are strongly against the tax. Boston Scientific, based in Massachusetts, has the support of Senator Elizabeth Warren. John Kerry, then-Senator from Massachusetts, negotiated the device maker tax down from the proposed 4.6% to its current 2.3%. And Chuck Schumer, the Democratic Senator from New York who was for the ACA before he was against it, see here, is also in favor of repealing the device tax.
Are you seeing a trend here? Do you see how the Senators from states with large medical device companies who generally are pro-Obamacare are anti-medical device tax? Over each of the last five years, medical device companies have spent more than $30 million on lobbying. Evan Bayh, a former US Senator from Indiana, is now employed by a medical device maker and lobbies hard for this repeal. See here. The medical device companies have no shortage of money to pass out to Senators and Representatives of both parties to get their special interests looked after. See here for a listing of the companies and how much they spent on lobbying and political donations. The medical device companies are equal opportunity power purchasers. They are more than happy to buy the votes of Democrats and Republicans alike. These companies argue that the tax will hurt profits and make them cut employees, but two years after implementation, the Congressional Research Service found no dire effects. See the complete report here, but this is a summary statement:
Opponents of the tax claim that the medical device tax could have significant, negative consequences for the U.S. medical device industry and on jobs. The estimates in this report suggest fairly minor effects, with output and employment in the industry falling by no more than two-tenths of 1%. This limited effect is due to the small tax rate, the exemption of approximately half of output, and the relatively insensitive demand for health services.
If this part of the funding for the ACA is repealed, I predict there will be plenty of other special interest groups that will demand that their contribution to the ACA be repealed, as well.
So just a couple of closing thoughts: How excited would the general public get about a medical device company tax of 2.3%? Why are Senators — other than the ones who are stridently opposed to all taxes — in such an outrage at this tax? Why will we most likely see this relatively small tax repealed in 2015? The answers, while disturbing, are simple. Senators and Representatives, regardless of their parties, are easily bought by special interest groups. Even the new hero of the left — Elizabeth Warren – isn’t immune to such financial pressure. And the American public is too easily swayed by the political pundits on their respectively biased media. This is a sad commentary on our political process and how, over and over again, money talks, louder than anything else in the room.
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