In 2010, Congress passed a tax on medical devices to offset a portion of the $1 trillion cost of the Patient Protection and Affordable Care Act (ACA). Beginning in 2013, a 2.3 percent tax will be imposed on the manufacture and importation of medical devices. Devices typically sold by retailers to consumers — including toothbrushes and bandages — are exempt from the tax, whereas devices purchased from wholesalers by health care providers, such as tongue depressors and ultrasound equipment, will be taxed.

What Is a Medical Device? A medical device can be an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part as defined by the U.S. Food and Drug Administration.

Medical Device Tax. The 2.3 percent tax will be imposed on revenue, not profits. This means the tax will be paid even on devices sold at a loss. Further, the increased tax burden represents a significant portion of the profit margin on each dollar of medical device sales.

Effect of Tax on Industry. How firms respond to the new tax will vary. To the extent they can, medical device makers will have an incentive to raise prices across the board to cover the cost of the tax. Although the industry is highly competitive, the fact that the tax applies to all firms could easily prompt industry-wide price increases.

Effect of Tax on Health Care Costs. Health care providers, hospitals, doctors and patients, as well as insurers, will bear much of the additional cost of the tax. To the extent that device makers are unable to pass on their additional costs, innovation and medical device workers will suffer.