Siemens' Sorensen describes impact of the medical device tax

Two years after going into effect, the 2.3% medical device tax imposed by the Affordable Care Act continues to generate controversy as well as continued calls for its repeal. The present Congress, for example, has seen the introduction of the Protect Medical Innovation Act of 2015, which would repeal the tax retroactively to its first year of implementation in 2013.

Gregory Sorensen, MD, the CEO and president of Siemens Healthcare North America, recently took some time to talk with Radiology Business Journal about his company’s opposition to the tax. Why doesn't the medical device tax make for good public policy?

Sorensen: It is a wrongheaded tax that is having unintended, negative consequences. It is slowing our ability to invest in new and innovative products. As a result of the tax, our company has had to cancel research into what we believe would be cost-lowering and potentially even life-saving technologies. Has it had an impact on employment at your company?

Sorensen: Absolutely. I personally have had to let people go as we have had to eliminate jobs. For example, we have a factory in Walpole, Mass., where we make point-of-care devices, such as those to manage conditions like diabetes. In the old days, your physician would send blood out for testing and you’d get results the next day, and then the nurse would give you a call and you would talk about the results and what changes to make. Importantly, recent studies have shown that if you can get the test for diabetes right there when you are with your doctor, their coaching is more effective, which means people are more compliant with their insulin regimen, and this means fewer downstream complications. So, getting the results at point of care can really help lower costs and improve patients’ lives. 

In Walpole, when this tax hit, we had to cancel projects, and we laid people off. And that’s just one factory. At dozens of our other factories around the world we have similar stories, whether it is MRI scanner advances that are delayed, or new types of diagnostic devices for testing, or developments to reduce X-ray dose. When this heavy of a tax hits us, we have very little recourse other than to reduce our spending. Some of that involves cutting back on research and development, and some of that is reducing employees. It’s a very painful process for us and is something that our country neither needs nor wants. Are there better alternatives to the medical device tax?

Sorensen: Yes. The whole point of these kinds of excise taxes is to discourage behaviors. That’s why we have excise taxes on alcohol and tobacco. When we raise taxes on tobacco, people smoke less.

There is an additional error that has crept into the conversation about the medical device tax.  An initial idea with the Affordable Care Act was that a lot more people would get insurance and that medical device companies like us would make a lot more money because we would sell a lot more devices to these newly insured.

That may be true for things like implants, but for what we do—imaging and blood tests—it has been the opposite. We’ve very carefully looked at the data and published it in the New England Journal of Medicine. This data shows that when the Massachusetts universal healthcare law went into effect, there was a differentially negative impact on medical imaging equipment. We saw a 30% drop in sales of medical imaging equipment in Massachusetts compared to the rest of the country, and it hasn’t recovered.  The idea that more coverage will lead to more sales of our products is just wrong. Most of the devices that we sell were already covered for Medicare patients, so this windfall concept has turned out not to be the case. A recent study from Congressional Research Service suggests that the tax has and will have a relatively minor effect on employment in your industry. What is your response to that?

Sorensen: That study was flawed for a number of reasons. The authors, as far as I can tell, never talked to anyone in the industry and as a result the report perpetuated some misconceptions and errors. For example, the report suggested the tax would be passed on to consumers.  But we know that is not the case. A couple of companies tried to pass it on, and hospitals outright refused to pay this. We have told our customers we are not passing the tax on to them. So this idea that we would pass it on to consumers is erroneous.

The idea that we wouldn’t lay people off is also erroneous. The authors estimate that the tax would have almost no effect on almost 600,000 U.S. workers, yet I know it has cost hundreds of jobs just in my company.

I do agree with two of the authors’ points: the medical imaging industry is taking on too big of a burden, and excise taxes aren’t logical. Taking the medical device tax out of the equation, what is the environment like in general for capital equipment spending in healthcare?

Sorensen: The general mood among healthcare providers is one of tremendous uncertainty.  They know there is a shift that is going to happen from fee for service to fee for value, but no one knows exactly when that is going to happen, or how.  Providers understand the Affordable Care Act has been passed, and yet they continue to see Congress try to repeal it, which means they aren’t sure what will really happen. 

Whenever there is uncertainty, customers typically stop or slow spending. That uncertainly is making the business environment very challenging for us. We have an aging population that needs and wants more medical care, and yet our customers are nervous about the future and are slowing their spending as a result.