UPDATED: Medical device tax suspended in $1.8T federal budget

The medical device tax has been suspended for two years. Industry, which has been waiting years to read those words since the 2.3% excise tax was enacted as part of the Affordable Care Act, reacted with jubilation.

The suspension, set to last two years, occurred on Friday when President Barack Obama signed a $1.8 billion taxation and spending bill that contained a variety of holiday goodies for various industries in the form of extended tax credits, as well as spending on the pet issues of both political parties. It also ended the threat of a looming government shutdown.

The temporary freeze follows a long hard slog by AdvaMed and med tech lobbying groups to repeal the tax, which was a part of the Affordable Care Act of 2010.

The fight featured endless attempts to repeal the Affordable Care Act in the House (where it was voted on at least 55 times) or Senate--none of which made it to President Obama's desk for a veto, a bipartisan nonbinding repeal of the tax in the Senate--which demonstrated the tax's strange politics--and a debate over the issue during the government shutdown of October 2013. During the shutdown, Republicans reportedly discussed paying for the tax by changing rules related to corporate pension plan payments.

According to an AdvaMed spokesman, the House has passed a repeal of the device tax at least 5 times since June 2012. The bills included two stand alone measures, a reconciliation vote, a jobs package and a continuing resolution. Other highlights included several speeches and press releases put out by AdvaMed and other opponents of the tax.

The efforts to end the tax finally paid off, albeit only for two years, though industry is betting that a temporary suspension will turn into a permanent repeal (or perhaps endless extensions of the suspension, as is often done on Capitol Hill).

"America's medical technology companies, including our nearly 2 million employees and the countless patients we serve, appreciate the broad bipartisan effort to suspend the medical device tax," said AdvaMed Board Chairman and Becton Dickinson ($BDX) CEO Vince Forlenza in a statement. "This critical relief would not be possible without the tireless efforts by a large group of champions in Congress as well as among the patient, provider and research communities. Congress and the administration have demonstrated that they recognize the negative effects of this tax. We urge policymakers to continue their work to eliminate the device tax and address other factors that are threatening the health care innovation ecosystem."

Medtronic ($MDT) expected the medical device excise tax to cost the company $210 million during fiscal year 2016. Because companies could deduct the tax when filing other taxes, the overall impact was closer to 1.5% of sales. But opponents of the Affordable Care Act funding mechanism argued that because it was a tax on sales, it hit small (often unprofitable) companies, like Warsaw, IN's 80-person OrthoPediatrics, the hardest.

"Luckily now we'll be able to go back and review that and remove the expense and cash that we had put in to the budget for the medical device tax and instead replace that with incremental programs developing new projects," OrthoPediatrics' CFO Fred Hite told a local television station.

Meanwhile, Irvine, CA's Masimo ($MASI), the maker of noninvasive patient monitoring technology, pledged to immediately begin to increase its investment in R&D and infrastructure in response to the suspension.

Not everyone outside the device industry is thrilled by the moratorium. Both parties wanted to repeal the tax in principle ever since it went into effect in 2013, but the inability to find an offsetting "pay for" was repeatedly cited as the main stumbling block, and the reason Democratic leaders like Sen. Harry Reid of Nevada refused to bring the tax up for a binding vote in the Senate.

So the suspension of the tax without an apparent pay-for is anticlimactic. Indeed, the suspension comes as part of a larger group of tax cuts that's expected to cost the nation $622 million, including a suspension of the so-called Cadillac tax on high-cost health insurance plans.

"Medical device companies that have raised prices and reduced their workforce and their employees' health benefits in the lead-up to the tax will receive a windfall if it's repealed," Dr. Bill Bithoney of healthcare consultancy group The BDO Center for Healthcare Excellence & Innovation, said in a statement. "While some camps will be legitimately relieved at the repeal of these levies, the simple reality is that the funds from both the Cadillac tax and the medical device tax are important to funding the Affordable Care Act. How will the projected billions of dollars raised by these taxes be replaced?"

The tax's impact on med tech jobs was the subject of much debate, in part due to the large amount of attention and criticism it received from congressional Republicans.

AdvaMed's claim that the tax cost more than 30,000 jobs earned three Pinocchios from the Washington Post, which called the claim misleading. Meanwhile, a Congressional Research Service report claiming that the tax resulted in minimal job losses earned the ire of industry.

The tax's performance as a fundraiser is clearer. It raised $913 million in the first half of 2013, or about 75% of what was expected. As many as 15,000 filers were anticipated, but only 5,107 medical device tax forms were filed.

Whether the suspension becomes permanent depends in large part on who becomes the next president.

During a 2014 speech at the annual AdvaMed convention, Democratic presidential candidate Hillary Clinton hedged on the issue of repeal, saying "I think it [a decision] has to be made within the context of a larger set of issues that have been raised by the ongoing implementation of the Affordable Care Act," and "We have to look and see what are the pluses and minuses."

- read the release from AdvaMed, MDMA and MITA
- read the release from Masimo

Editor's Note: This article has been updated with additional details, most notably information about prior attempts to repeal the tax that passed the House.