Precious Osuchukwu

ECON 3330
Prof. Ketsler

The changing landscape of health care has given government the opportunity to increase
its participation in health care. At one point health care was simply the relationship
between physician and patient. That ideal is being eclipsed by the emergence of an
industry in the status quo, and as more aspects of health care commercialize, the
government now has more opportunity to regulate. With current health care expenditures
at about 20% of GDP and the industry value at 3 trillion dollars, the government is
incentivized to keep that part of the economy in good health.
One of the reasons for high spending is the high costs of medical technology.
Harvard health law professor George Moseley broadly defines medical technology as
procedures, equipment, and processes by which medical care is delivered (KFF). This
definition also encompasses new medical and surgical procedures (e.g., angioplasty, joint
replacements), drugs (e.g., biologic agents), medical devices (e.g., CT scanners,
implantable defibrillators), and new support systems (KFF). Medical technology affects
health care costs because there arent many parts of the health care system that do not
utilize medical technologies. Moreover, as new technologies are developed, more money
is being spent in the aim of finding cost-efficient and cost-effective technology. Likewise,
almost all medical technology seeks to improve quality and duration of life. As people are
able to live longer, they are spending more to maintain their health via medical

technology. Not only that, but as new technology is able to treat ailments never treated
before, money is being spent on things and in ways it has never been spent before.
The advanced technology utilization, research and development spending, quality
of car, and government regulation are at all-time highs. Medical technology companies
are promoting and pushing their products on as many hospitals as possible. Access to the
quality of care is at an all-time as well. There is still room for improvement in access as
different segments of the population are dependent on different institutions to help them
gain access to care, e.g. the elderly and Medicare (discussed later in this paper).
Consumption and cost of care are also at an all-time high as well. Hospitals, health
systems, insurers and policy makers are looking to control costs in an attempt to improve
access to medical technology. The Patient Protection and Affordable Care Act contains in
it some cost control measures to achieve this goal, including targeting the pharmaceutical
sector and levying a medical device tax of 2.3%.
There are specific cost control measures being imposed on the pharmaceutical
industry. First, pharmaceutical companies that manufacture name brand drugs will have
to pay an annual fee for vending the name brand pharmaceuticals. The rate was $2.5
billion in 2011 and is projected to peak at $4.1 billion in 2018. This cost will be divided
among the companies that vend name brand pharmaceuticals in a market share ratio basis
(Morgan Lewis). This is a targeted approach by the government to maximize revenue to
help fund the ACA. Name brand pharmaceuticals cost more than their generic
alternatives. While generic manufacturers do not have to pay this annual fee, they are still
subjected to cost controls that target the industry at large.

Another pharmaceutical cost control measure from the ACA targets the Medicare
Part D coverage discontinuation that occurs when a seniors annual drug spending is
between $2,930 and $4,700 (Reuters). This is also known as the doughnut hole. During
this period the senior pays full price for their medication. The cost control in place is a
government mandated subsidization of the drugs to the payees that are in the
aforementioned Medicare purgatory on the dime of the pharmaceutical companies. The
doughnut hole subsidization is to the tune of a 50% discount on name brand drugs and a
14% discount on generic drugs (Reuters). The intent of this cost control is to close the
gap in coverage over time, the tradeoff being the foregone revenue from the
pharmaceutical companies. The pharmaceutical companies will also pass along additional
costs incurred by the tax on to the consumer even amid the price ceilings imposed by the
government.
The medical device tax is classified as an excise tax. Excise taxes target specific
goods to discourage a certain behavior and uses the revenue to fund a project. The
medical device tax is intended to help generate revenue to fund health care reform. It is
projected to generate $29 billion over 10 years in net revenues (Washington Post). While
the tax has good intentions, it comes with tradeoffs. The companies incurring the tax will
have to make internal and external adjustments to help bear the burden of this new tax.
Its worth noting that the tax is on revenue and not profit. This means that these
companies will be taxed on anything they sell irrespective of profit or loss on the sale.
This is significant as many companies in their early stages of development do not see
profits until many years after the development of their product and this tax further sets
them back. This means that smaller medical technology companies with smaller implicit

research and development funds will disproportionally be affected. Furthermore, the

businesses already have to incur a federal corporate tax rate to the tune of 35% in
addition to state corporate and employee income taxes on the micro scale.
As they government intends to maximize tax revenue, the businesses are going to
do whatever they can to maximize their profit. They can always pass off the price of the
tax to the consumer. Ironically this would increase the price of medical devices and
move the country further from Affordable Care as it results in a net increase of prices.
The companies can also pass off the tax to hospitals. The implications here are much
more chaotic. The company and hospital are in business because of the price agreement
between the two parties. As the price of producing products increase, the medical
technology companies will want to increase the price of their products to the hospitals
which are already operating within a small margin.
The point at which companies start to incur more cost, they start downsizing and
jobs are lost. Some companies have started to blame their prospective financial
contraction on the medical device tax. One such company is AdvaMed, which reports the
tax has already prompted the elimination of 14,000 jobs and prevented the creation of an
additional 19,000 (Heartland). If the industry transitions into a phase where jobs from
different companies are being cut at the same time, this could make the qualified people
that would otherwise pursue this job field to think again. A dismal job outlook could
discourage brilliant people, from pursuing the medical technology development field.
With less man power comes a slower rate of innovation. This is true because the
production possibilities curve is not being realized at its maximum potential under the
circumstances brought on by the medical device tax. The curve is would be measuring

innovation assuming it is a function of manpower (x-axis) and R&D costs (y-axis). The
tax will pull production away from current levels near the periphery of the curve. The tax
takes away from the labor force when businesses start laying people off, as a result,
manpower is not being utilized at maximum because of underemployment. The tax also
takes away from the amount of money that could be reallocated within a company, as a
result, R&D is not being utilized at maximum.
The cost control measures within the Patient Protection and Affordable Care Act,
financially, are bad decisions with good intentions. The subsidization of pharmaceuticals
on for Medicare beneficiaries is a temporary fix to a permanent problem and comes at the
expense of pharmaceutical companies. Medical device companies will have to increase
the prices of their products to make up for loss revenue with the medical device tax.

Works Cited
http://kff.org/health-costs/issue-brief/snapshots-how-changes-in-medical-technologyaffect/
http://www.enlightresearch.com/insights/2012/9/21/the-affordable-care-act-impact-onthe-life-sciences-industry.html
http://www.morganlewis.com/pubs/WashGRPP_ImpactOnPharmaManufacturers_LF_15a
pr10.pdf
http://www.reuters.com/article/2012/06/05/us-column-miller-medicareidUSBRE8540LD20120605

http://taxfoundation.org/article/aca-medical-device-tax-bad-policy-need-repeal
http://taxfoundation.org/blog/us-has-highest-corporate-income-tax-rate-oecd
http://www.washingtonpost.com/blogs/fact-checker/wp/2015/01/07/has-the-medicaldevice-tax-eliminated-thousands-of-jobs/
http://heartland.org/policy-documents/research-commentary-medical-device-tax-update