10/15/2013 01:05 pm ET Updated Oct 15, 2013

Small Tax On Pacemakers Threatens To Blow Up World Economy

WASHINGTON -- Will the world economy be brought to its knees over a tax on pacemakers and hip replacements?

As the outlines of a potential budget deal in Congress grow clearer, the medical device industry is hanging on tenterhooks. Having waged a lobbying battle since 2009 against an excise tax of 2.3% on medical device sales, the industry secured a victory Tuesday morning when House Republican leaders told rank-and-file members that the deal they would bring to the floor includes a 2-year delay of the tax. The Senate and White House are unlikely to support doing away with key funding for the health care law - the tax is projected to raise as much as $30 billion over 10 years to help fund the law - bringing the U.S. one step closer to default, as an Oct. 17 deadline looms.

But the industry has a friend in the right place: House Speaker John Boehner (R-Ohio) repeatedly championed the cause of medical devices during fiscal cliff talks, according to a Democratic source who attended the meetings but requested anonymity to speak freely. And at this year's State of the Union address, a CEO from a medical device company was among his special guests.

Boehner's crusade on behalf of the industry results from a quirk in the American political system, namely that while Boehner may be the speaker of the House of Representatives, he is also first and foremost the representative of the 8th District of Ohio -- medical device country.

A spokeswoman at the top trade group for the medical device industry, Advamed, did not respond to a request for comment on the state of negotiations over the tax.

Boehner is hardly alone in his dislike of the tax -- or in his support for the medical device industry. Bipartisan coalitions in both chambers have long opposed the tax, and both the House and the Senate have independently passed bills that would have repealed it -- they just haven't been able to agree on one final budget. In the Senate, a full 79 members voted to repeal the tax earlier this year. Medical devices are big business in a number of blue states, including Massachusetts, California and Minnesota. Indiana, which borders Boehner's Ohio congressional district, is also a hotbed of medical manufacturing.

To understand the medical device tax, you need to go back to the fall of 2009, when the Senate Finance Committee huddled with health care industry representatives to hammer out a new plan to insure tens of millions of uninsured Americans under what would become the Affordable Care Act, also known as Obamacare. In exchange for a huge new pool of customers, industry sectors like hospitals and insurance companies agreed to compromise on key points: Hospitals accepted reduced Medicare reimbursements in exchange for a massive expansion of the insured population. Drug makers offered discounts and a closure of the so-called "donut hole" in exchange for the subsidized demand.

While all this compromising was going on, there was one health care sector which largely refused to offer a compromise in exchange for the massive new market the ACA opened up: medical device makers.

During negotiations over the bill, Democrats considered an exemption for medical device manufacturers with revenue of less than a certain amount, but the big companies persuaded the smaller ones to unite with them in the hope of beating the tax altogether, a Democratic Senate source close to the negotiations told HuffPost, speaking on background to discuss closed-door negotiations. That union allowed the big companies to stay out of sight during the lobbying blitz, instead sending the small startups to visit congressional offices -- a more sympathetic image for the industry at large. (Wall Street employs the same tactic when lobbying against derivatives regulation by sending milk-truck drivers and such to the Hill.)

But as Wyoming Sen. Mike Enzi, a top Republican on the Senate Finance Committee panel, put it, in Washington, "if you're not at the table, you're on the menu." In a law filled with complicated cost sharing and reimbursement arrangements between the government and the health care industry, the final ACA bill contained a tax on the sale of medical devices. According to congressional estimates, repealing the tax would add $32.5 billion to the deficit over 10 years.

Now, more than three years later, the industry is still furious. But not as furious as hospitals, health insurers and pharmaceutical companies would be if the device tax were repealed, a deal that would amount to a giant giveaway to big corporations.

If medical device makers are given a pass, it would open a veritable Pandora's box of pressure from different sectors of the health care industry to change the ACA. Already, health insurers, represented by the America's Health Insurance Plans (AHIP), have succeeded in getting a bill introduced that would carve out the present tax on health insurance plans, which is projected to raise around $100 billion over 10 years to help pay for expanded coverage. While the bill has little chance of becoming law, it's a good example of the doors that would be opened if the device tax were repealed.

Hospitals, too, are hoping for the same kind of deal, according to an open letter circulated on the Hill recently by Chip Kahn, president of the Federation of American Hospitals. In it, Kahn called for "parity," or fairness, in "ACA fixes," or tweaks in the Obamacare law. In short, he was saying that if medical device manufacturers are going to get a pass, hospitals are going to want one, too.

CORRECTION: Due to an editor error, the original article misstated the name of the health care law.



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