October 04, 2013
Give the NYT and the rest of the media a really big “F” for their coverage of the medical device tax. Next to no one knows where it came from and why it was included in the Affordable Care Act (ACA). That means the media have done a terrible job, just as we might think school teachers aren’t doing a very good job educating students if they graduate high school without being able to read.
If you read the NYT cover to cover every day for the last year, you would probably think that the medical device tax was simply a way to dig up an extra $2-3 billion a year to cover the cost of the ACA. That of course is what General Electric and the other medical device manufacturers want you to believe.
In fact, the medical device tax is really a way to take back a windfall that General Electric and other manufacturers expect to get from the ACA. The story is that medical devices, like prescription drugs, are generally relatively cheap to produce. They involve big research costs that their manufacturers expect to recover by selling their devices at large mark-ups.
To take a simple example, suppose General Electric spends $500 million developing a new scanner. General Electric sells the scanners for $1.1 million. Since it costs them $100,000 to manufacture them, they can pocket $1 million for each scanner they sell. Before the passage of the ACA, General Electric had expected to sell 1000 of these scanners, which would net them a total of $1 billion over their production costs. This allows General Electric to recover their $500 million in development costs and pocket $500 million in profit.
However the ACA changes this picture by increasing the demand for scanners, as more people have access to health care. As a result of the ACA, General Electric now expects to sell ten percent more scanners or 1100. The additional 100 scanners will mean an additional $100 million in profits in excess of what General Electric had anticipated. (Remember, its development costs have not changed, this is pure profit.)
General Electric would of course be very happy with situation, just as it is any time the government opts to give the company money. The medical device tax, which is set at 2.3 percent of sales, is an effort to recoup the unexpected windfall that General Electric and other medical device makers would otherwise receive from the ACA.
The fact that almost no one understands the origins of the medical device tax demonstrates an astounding failure on the part of the nation’s media. If budget reporters were school teachers, many of them would be looking for new jobs rights now.
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