[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]








                       TAX-RELATED PROVISIONS IN
                    THE PRESIDENT'S HEALTH CARE LAW

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 5, 2013

                               __________

                           Serial No. 113-OS1

                               __________


         Printed for the use of the Committee on Ways and Means


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                                 ______

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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel

                                 ______

                    SUBCOMMITTEE ON HUMAN RESOURCES

             CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DIANE BLACK, Tennessee               JOHN LEWIS, Georgia
LYNN JENKINS, Kansas                 JOSEPH CROWLEY, New York
KENNY MARCHANT, Texas                DANNY DAVIS, Illinois
TOM REED, New York                   LINDA SANCHEZ, California
ERIK PAULSEN, Minnesota
MIKE KELLY, Pennsylvania

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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 5, 2013 announcing the hearing.................     2

                               WITNESSES

Douglas Holtz-Eakin, Ph.D., President, American Action Forum, 
  Testimony......................................................     6
Dan Moore, President & CEO, Cyberonics; Chairman, Medical Device 
  Manufacturers Association, Testimony...........................    18
Walt Humann, President & CEO, OsteoMed, Testimony................    27
David Kautter, Managing Director of the Kogod Tax Center, 
  American University; Executive-in-residence, Department of 
  Accounting and Taxation, Testimony.............................    34
Shelly Sun, CEO and Co-Founder of BrightStar Care, Testimony.....    46
Hugh Joyce, James River Heating and Air Conditioning Company, 
  Testimony......................................................    55
Paul N. Van de Water, Ph.D., Senior Fellow, Center on Budget and 
  Policy Priorities, Testimony...................................    60

                       SUBMISSIONS FOR THE RECORD

American Farm Bureau Federation..................................    83
California Healthcare Institute..................................    87
Cook Group.......................................................    89
Dental Trade Alliance............................................    98
Kenneth H. Ryesky................................................   100
Medicaid Health Plans of America.................................   108
National Association for the Self-Employed.......................   110
The Brinks Company...............................................   112
The Center for Fiscal Equity.....................................   115

                   MATERIAL SUBMITTED FOR THE RECORD

Questions for the Record.........................................   119

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       TAX-RELATED PROVISIONS IN THE PRESIDENT'S HEALTH CARE LAW

                              ----------                              


                         TUESDAY, MARCH 5, 2013

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 11:12 a.m., in 
room 1100, Longworth House Office Building, the Honorable 
Charles Boustany [Chairman of the Subcommittee] presiding.
    [The advisory of the hearing follows:]

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HEARING ADVISORY

    Boustany Announces Hearing on the Tax-Related Provisions in the 
                      President's Health Care Law

1100 Longworth House Office Building at 11:00 AM
Washington, February 26, 2013

    Congressman Charles W. Boustany, Jr. M.D. (R-LA), Chairman of the 
Subcommittee on Oversight of the Committee on Ways and Means, today 
announced the Subcommittee will hold a hearing on the tax provisions 
contained in the Patient Protection and Affordable Care Act and Health 
Care and Education Reconciliation Act of 2010 (``President's Health 
Care Law''). The hearing will take place immediately following the 
Subcommittee organizational meeting that begins at 11:00 a.m. on 
Tuesday, March 5, 2013, in Room 1100 of the Longworth House Office 
Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Subcommittee and 
for inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    According to the Government Accountability Office (GAO), the 
President's health care law contains 47 tax or tax-related provisions. 
Estimates by the Congressional Budget Office (CBO) and the Joint 
Committee on Taxation (JCT) confirm that tax increases associated with 
the law total more than $1 trillion over the next ten years. Many of 
these provisions are already in effect, and others will become 
effective in 2014. Key provisions include: a tax on medical device and 
drug manufacturers, and health insurers; a tax on individuals and 
families who do not purchase government-mandated health insurance, a 
tax on employers that do not offer government-mandated health 
insurance, additional Medicare taxes and taxes on investment income.
      
    In its review of the tax provisions of the President's health care 
law, the Subcommittee will consider the: (1) status of implementation 
of key tax provisions; (2) compliance issues associated with the tax 
provisions and accompanying regulations; and (3) economic effects of 
the provisions.
      
    In announcing the hearing, Chairman Boustany said, ``The 
President's health care law imposes a number of new taxes and reporting 
requirements on individuals and various industries--and many of those 
tax hikes hit the middle class. We are starting to see that these 
provisions make it harder for businesses to create good paying jobs and 
may adversely affect the quality and accessibility of health care. As 
the Committee moves forward with comprehensive tax reform, it is 
imperative that we examine the law's tax provisions and consider their 
impact on the administration of the Tax Code as well as on individuals, 
families, and employers.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on implementation of the tax and tax-related 
provisions contained in the President's health care law.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``Hearings.'' Select the hearing for which you would like to submit, 
and click on the link entitled, ``Click here to provide a submis

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sion for the record.'' Once you have followed the online instructions, 
submit all requested information. ATTACH your submission as a Word 
document, in compliance with the formatting requirements listed below, 
by the close of business on Tuesday, March 19, 2013. Finally, please 
note that due to the change in House mail policy, the U.S. Capitol 
Police will refuse sealed-package deliveries to all House Office 
Buildings. For questions, or if you encounter technical problems, 
please call (202) 225-1721 or (202) 225-3625.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman BOUSTANY. We will now begin our hearing on the 
tax-related provisions in the President's health care law.
    Three months ago President Obama signed into law the 
Patient Protection and Affordable Care Act and the Health Care 
and Education Reconciliation Act. For individuals, families, 
and small businesses struggling to pay for health care, this 
milestone is no cause for celebration. Today we will examine 
the impact of key tax provisions of that law.
    The health care law contains over a trillion dollars in new 
taxes on employers, medical device makers, families buying 
health insurance, and others. These unprecedented new taxes 
could hardly come at a worse time as our economy continues to 
struggle through the slowest recovery on record.
    With the Congressional Budget Office predicting that 
unemployment will remain above 7 percent, the law's new taxes 
make it more costly for employers to hire, more expensive for 
families to purchase health insurance, and more difficult for 
the health care industry to innovate.

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    And it is getting worse every month. Federal agencies are 
busy issuing new regulations to implement the law, adding over 
150 million new compliance burden hours a year and billions of 
dollars in cost that will be borne largely by employers. These 
are time and red tape costs on top of the taxes. This is not a 
recipe for economic growth and job creation.
    Today's hearing will explore these new taxes and their 
economic effects. The new medical device tax is particularly 
destructive, as it targets one of the few remaining industries 
in which America continues to lead the world in innovation. 
This is an industry in which companies often go years without 
making a profit, hoping to survive long enough to reach 
profitability and introduce innovative, life-saving medical 
products.
    But the new tax hits employers regardless of profitability, 
and has already resulted in layoffs and additional delays in 
new products reaching the market.
    The new insurance tax and employer mandate threaten to 
stifle small business growth across all industries. Beginning 
next year, job creators will be saddled with burdensome new 
rules and taxes that disincentivize hiring new employees and 
provide economic incentives to reduce employees' hours and drop 
health insurance coverage altogether.
    Before knowing whether the IRS will deem job creators a 
large employer and thus subject to the tax, employers will have 
to work out a complicated algorithm, aggregating the hours of 
all part-time workers and adding in the number of full-time 
workers. With the new law, Washington is effectively telling 
many Main Street businesses to cut their workforce and stop 
growing, hardly the incentives we need to be giving employers 
in our current economic climate.
    Today's hearing is especially important because we will be 
hearing not only from economic and tax experts, but also job 
creators from across the country. These are individuals who 
spend their days trying to grow their businesses and expand 
economic opportunity, but are forced to do so against 
prevailing headwinds of new taxes and regulations from 
Washington. They know the effects of the new law firsthand 
because they live with these effects.
    I was also hoping to welcome a witness who runs a small 
business in my district, but unfortunately, he had to cancel 
after his business partner had a medical emergency. I certainly 
wish his partner a speedy recovery, but this goes to show how 
unpredictable and how vulnerable a lot of our small business 
operations truly are. Washington should be making their jobs 
easier, not more difficult.
    Last year the Subcommittee held hearings on a provision in 
the health care law that requires holders of FSAs and HSAs to 
get a prescription in order to use accounts to buy over-the-
counter medicine. The House subsequently passed legislation, 
authored by Congresswoman Jenkins, repealing this provision, as 
well as a medical device tax repeal, which was authored by 
Congressman Paulsen.
    I have introduced legislation repealing both the employer 
mandate tax and health insurance tax. These issues all 
reinforce the fact that the health care law was not simply a 
health care law. It was an enormous tax change, and as such, it 
is proper for the Sub

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committee to examine these laws, which are within the scope of 
tax reform.
    Now I'm happy to yield to the distinguished Ranking Member, 
my friend Mr. Lewis from Georgia.
    Mr. LEWIS. Thank you, Mr. Chairman. I thank the Chairman 
for holding this hearing on the Affordable Care Act. We are 
always pleased to discuss our landmark health care reform law, 
which will expand health coverage to 27 million Americans.
    The last time the Oversight Subcommittee reviewed the tax 
provisions of this law was in September 2012. Since enacted, 
the Affordable Care Act has helped millions of Americans. For 
example, the Affordable Care Act has protected over 17 million 
children with preexisting conditions who can no longer be 
denied health coverage, and more than 6 million young adults 
who have health insurance through their parents' health plan 
until age 26.
    As another example, the health care law requires insurance 
companies to spend a certain amount of the premiums they 
collect on medical care. As a result, about 13 million 
Americans received more than $1 billion in rebate payments last 
year from insurance plans that failed to spend enough on 
benefits.
    Because of positive reforms like these, we are moving 
forward. We must ensure that we act with all deliberate speed 
to implement the Affordable Care Act. I know that this hearing 
focuses on provisions that impose taxes on industries that 
benefit from the law and wealthy Americans. This one-sided view 
does not examine other provisions in the law that deliver 
hundreds of billions of dollars of Federal tax credits to 
millions of American families and small businesses.
    These tax credit and cost-sharing subsidies will make 
health insurance affordable for middle-class Americans and 
families. Countless others now have peace of mind, knowing they 
are not just one step away from losing their health insurance, 
when it is needed the most.
    Mr. Chairman, I am confident that the tax provisions of the 
Affordable Care Act will be carried out on schedule. Today I 
look forward to hearing where we are in the process, and the 
issues that remain. I want to thank all of the witnesses for 
their testimony and recommendations.
    Thank you very much, Mr. Chairman.
    Chairman BOUSTANY. Thank you, Mr. Lewis.
    Now it's my pleasure to welcome the panel of seven 
witnesses we have before us today. Our witnesses today run the 
gamut from academics to budget experts to business owners. I'm 
delighted to have all of you here with us today. I think this 
will be a very enlightening hearing.
    First we will hear from Douglas Holtz-Eakin, President of 
the America Action Forum here in Washington, D.C. Dr. Holtz-
Eakin has been Chief Economist with the President's Council of 
Economic Advisors, Director of the Congressional Budget Office, 
and fellow at various think tanks. We're pleased to have his 
expertise today.
    Next we have Dan Moore, President and CEO of Cyberonics, a 
global medical device manufacturer. Mr. Moore also serves as 
Chairman of the Medical Device Manufacturers Association, a

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trade association composed of smaller medical device companies. 
Thank you, Mr. Moore, for joining us today.
    Third, we will hear from Walter Humann, President and CEO 
of OsteoMed, a surgical device manufacturing company based in 
Dallas. Mr. Humann joined OsteoMed in 2001, growing the company 
into a variety of surgical device markets. Mr. Humann, thank 
you for joining us.
    Fourth we will have David Kautter, Managing Director of the 
Kogod Tax Center and Executive-in-Residence in the Department 
of Accounting and Taxation at American University. Mr. Kautter 
had a distinguished career at Ernst & Young, where he recently 
served as Director of National Tax. Mr. Kautter also served on 
Capitol Hill as a legislative counsel to Senator John Danforth. 
Thank you for bringing your expertise to us today, Mr. Kautter.
    Next we will hear from Shelly Sun, CEO and Co-Founder of 
BrightStar Care, a premium health care staffing company. 
BrightStar has 250 locations nationwide, providing the full 
continuum of care, from home care to supplemental staffing for 
corporate clients like nursing homes and physicians. Ms. Sun 
just finished writing her first book, and was named 
International Franchise Association Entrepreneur of the Year in 
2009. Ms. Sun, thank you for joining us today.
    Sixth we will hear from Hugh Joyce, President of the James 
River Air Conditioning Company in Richmond, Virginia. Mr. Joyce 
has been president of James River Air Conditioning for 19 
years. He is here to speak from his experience as a small 
business owner, as well as on behalf of the National Federation 
of Independent Businesses. Mr. Joyce, thank you for joining us 
today.
    And finally, we'll hear from Mr. Paul Van De Water, Senior 
Fellow with the Center on Budget and Policy Priorities. Dr. Van 
de Water, we appreciate you being here, as well.
    We welcome all the witnesses. We received your written 
statements, and they will be made part of the formal hearing 
record. You will each have five minutes for your oral remarks, 
and I will start with you, Dr. Holtz-Eakin.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., PRESIDENT, AMERICAN 
                          ACTION FORUM

    Mr. HOLTZ-EAKIN. Chairman Boustany, Ranking Member Lewis, 
and Members of the Committee, I thank you for the privilege of 
appearing today. My written testimony contains a more detailed 
analysis of some of the major taxes imposed in the Affordable 
Care Act. Let me make four brief points as an overview.
    Point number one is simply the scale of taxation is very 
large--easily over 800 billion, reaching nearly a trillion, and 
larger than the, I think, much more ballyhooed fiscal cliff 
deal that was reached earlier this year. Any law that imposes 
that scale of taxation ought to be looked at very carefully by 
the conventional metrics of tax policy.
    And those would be how distortionary are the taxes which 
are imposed? What is the incidence of those taxes--that is, who 
will actually bear the burden, and are they fairly distributed? 
And then third, what will be the macroeconomic effects of those 
taxes?

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    Let me touch briefly on each. The ACA taxes are highly 
distortionary. If you take the benchmark that non-distortionary 
taxes will have a broad base and equal treatment of equals, the 
ACA taxes look very different than that.
    The device tax and the health insurers tax are sector-
specific taxes that will impact the ability to attract labor 
and capital to those sectors. As I detail in the written 
statement, each also has flaws in its design within that 
sector, the device tax discriminating against relatively small 
medical device manufacturers, and health insurers tax having a 
whole set of what I view as very problematic provisions, 
treating differently for-profit and not-for-profit insurers, 
treating even more differently those who have extensive lines 
of business in elderly and low income products.
    It's a very distortionary tax, and is the only one that 
I've ever seen that actually demands that you raise a fixed 
amount of revenue, regardless of what it does to the industry, 
beginning with 8 billion next year. And so it's a very 
distortionary tax.
    As you know, the so-called Medicare taxes, surtaxes on 
payroll income and on net investment income, draw sharp lines 
in the Tax Code. And even more troubling to me, those lines are 
not indexed for inflation; indexing the Tax Code for inflation 
has been a principle adopted by the United States since the 
early 1980s, and doesn't represent good tax policy.
    So as a whole, I think of these as not-particularly-well-
designed taxes, given the level of revenue they will raise.
    They are also not especially progressive taxes. The taxes 
that are levied on device manufacturers are going to end up in 
health insurance costs, which will be then in turn shifted into 
premiums. Health insurance is a broadly consumed product, with 
the largest burden on the middle class in America.
    Certainly the health insurance tax is going to show up very 
directly in premiums, and given some of its peculiarities in 
design--the inability to deduct this tax for the purposes of 
corporation income tax--there will be even greater upward 
pressures on premiums as a result.
    And the so-called Cadillac tax on high-cost plans, despite 
its name, is a tax that's going to hit the middle class. And 
taken as a whole, these impacts are going to fall on the middle 
class and exacerbate other premium pressures that are already 
present in the ACA from benefit mandates and other regulations 
that have been imposed.
    And the final point is that the ACA taxes suffer from very 
poor macroeconomic timing. As this Committee well knows, we are 
struggling to recover from a financial crisis and very deep 
recession. It is hardly a benchmark of great policy to levy 
hundreds of billions of dollars in new taxes, which are poorly 
designed, and to accompany them with a very heavy regulatory 
load, and an expansion of entitlement programs at a time when 
the U.S. debt exceeds the size of its economy and is being 
driven by the existing entitlement programs.
    So I think that probably the greatest lesson that can be 
taken away from look at these taxes carefully is that even if 
you wanted to raise this revenue, you could do it better, and 
that thinking hard

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about this in the context of tax reform, which I know the Ways 
and Means Committee is deeply interested in, is probably a good 
idea.
    [The prepared statement of Mr. Holtz-Eakin follows:]
   
   
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    Chairman BOUSTANY. Thank you, Dr. Holtz-Eakin.
    Mr. Moore, you are recognized for 5 minutes.

    STATEMENT OF DAN MOORE, PRESIDENT AND CEO, CYBERONICS; 
       CHAIRMAN, MEDICAL DEVICE MANUFACTURERS ASSOCIATION

    Mr. MOORE. Thank you, Chairman Boustany and Ranking Member 
Lewis, for the opportunity to testify here today. As mentioned, 
my name is Dan Moore, and I am CEO of Cyberonics, a Texas-based 
medical device company that focuses on epilepsy and other 
neurological conditions. I am also the chairman of the board

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for the Medical Device Manufacturers Association, and I'm 
pleased to be testifying today in that capacity.
    The medical device technology industry is one of America's 
great success stories. We contribute to Americans living 
longer, healthier, and more productive lives. We play an 
important role in driving economic growth by employing high-
skilled manufacturing workers, who contribute to our industry's 
trade surplus. We are the envy of countries around the globe.
    However, I have real concerns about the future of America's 
global leadership in medical devices. These concerns stem in 
part from personal experiences as the son of a steelworker, and 
I'm hoping that as a country we do not lose leadership in yet 
another industry.
    I was born in Gary, Indiana, which at one time was one of 
two big American steel towns. My family, friends, and neighbors 
were all employed in the steel industry. These hardworking 
Americans had opportunities for advancement when the industry 
was thriving.
    I'm extremely proud of my father, who went from being a 
laborer to having responsibility for maintenance in three mills 
that were part of the Gary Works Corporation. He worked hard 
and was able to provide for my mom and our family of eight 
children. The United States was the global leader in steel 
production and manufacturing, and the byproduct of this 
leadership was great jobs that built communities and sustained 
families for decades.
    Sadly, we all know what happened to this chapter of 
American manufacturing. I am here today to tell you today that 
the global leadership position of the medical device industry 
is at a crossroads, and not unlike what faced America's steel 
industry years ago.
    If we lose this leadership and the great jobs and all the 
benefits that come with it, we will never get it back. And 
countless communities, again, will never look the same. The 
good news is that there is legislation to fix this problem, and 
bipartisan momentum continues to build in support of it.
    Beginning on January 1st, medical device innovators began 
paying a 2.3 percent excise tax to the Government. I'm often 
asked, a 2.3 percent tax, how could it be so damaging to 
innovation, jobs, and patient care? After all, it's only 2.3 
percent. Right? It's important to remember that this is a tax 
on medical device company revenues, not profits. One study 
estimated the tax will increase a company's effective tax rate 
by an average of 29 percent.
    Many companies are having their entire profits wiped away 
because of the medical device tax. Others aren't even 
profitable yet, but find themselves still having to pay a tax 
that is destroying their ability to invest in research and 
development to fund future medical breakthroughs. A study 
showed that this onerous policy would lead to the loss of 
43,000 good-paying jobs.
    Regardless of company size, success, or stage of 
development of medical technologies, a 2.3 percent excise tax 
will have a significant impact, and at the end of the day a 
negative impact on providers and patients, the people we intend 
to help.
    We all love the stories of innovators and entrepreneurs 
coming up with ideas in their garages or spare bedrooms and 
building American dreams into proud organizations. As I speak 
before you today, physicians and engineers are working on new 
technologies

[[Page 20]]

like an artificial pancreas that will allow diabetes to control 
blood glucose levels automatically. Just weeks ago, the FDA 
approved a new product that literally allows the blind to see.
    Do we really want to risk the loss of these amazing new 
devices by imposing an additional tax on medical device 
companies? Medical technology innovators are pushing the 
boundaries of science, all driven by American ingenuity and 
American manufacturing. The medical device tax is putting an 
end to some of these dreams and aspirations before they ever 
get out of the lab, or perhaps one's garage.
    I respectfully urge all of you to continue working together 
to provide an environment where tomorrow's technologies and 
devices will not be sacrificed as a result of misguided 
policies today. None of us want to have to explain to our 
children one day why they don't have the opportunity to work in 
the same dynamic industry as their parents, focused on 
improving the human condition.
    I pledge to all of you that I will do everything I can to 
help Congress and policy-makers ensure the 21st century is as 
bright for medical technology innovation as was the last. I 
urge you to support the repeal of this onerous medical device 
tax, a tax on innovation, jobs, and most important, a tax on 
patient care. Thank you for the opportunity to share my 
concerns today.
    [The prepared statement of Mr. Moore follows:]
    
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    Chairman BOUSTANY. Thank you, Mr. Moore.
    Mr. Humann, you are recognized for 5 minutes.

     STATEMENT OF WALT HUMANN, PRESIDENT AND CEO, OSTEOMED

    Mr. HUMANN. Chairman Boustany, Ranking Member Lewis, 
Members of the Subcommittee, thank you all for the opportunity 
to testify before you today. Again, my name is Walt Humann. I'm 
president and CEO of OsteoMed, a medical device company located 
in Dallas, Texas. I am also on the board of the Medical Device 
Manufacturers Association.

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    On any Tuesday like today, I would normally be at 
OsteoMed's facilities, ensuring that our company continues to 
develop and produce innovative medical technologies that 
improve patient outcomes, lower health care costs, and provide 
well-paying jobs to hardworking Americans.
    Instead, I am before you now to sound the alarm bell on the 
devastating excise tax that is already having a negative impact 
on thousands of medical device companies. Unfortunately, these 
negative consequences of the excise tax have already been felt 
at OsteoMed.
    Like the majority of medical device companies, we have 
humble beginnings as a startup company. OsteoMed was founded in 
1991 in Glendale, California. We started supplying proprietary 
patented instruments for the orthopedic industry, and quickly 
expanded to design, manufacture, and produce various small bone 
fixation devices, surgical implants, and surgical systems. I 
want to highlight for you a few of our products that have 
dramatic impacts on patient care.
    One of our systems are used for children born with severe 
head and facial deformities. Our product allows surgeons to 
reconstruct very young babies for normal function and 
appearance, and in many cases avoid the feeding problems, the 
tracheotomies, and the other feeding and treatment problems 
that would hinder normal childhood development.
    Another system we produce focuses on repairing and 
reconstructing the feet and ankles. OsteoMed recently was 
fortunate to support a mission trip to Mexico, where these 
products were used by surgeons to allow very young children to 
walk normally for the very first time. However, our ability to 
innovative and improve upon these projects is now threatened by 
the medical device tax.
    When Congress passed the Affordable Care Act in 2002, it 
unfortunately also included this devastating tax on innovation. 
In particular, the ACA includes a 2.3 percent excise tax on the 
sales of most medical devices in the U.S. Again, this tax 
applies to the total revenue of a company, not to profit.
    In many cases, companies will end up paying more in taxes 
than they actually generate in profits. As an example, two 
years ago we started a project within OsteoMed that greatly 
simplifies back surgery and reduces a two-hour operation to 
just 30 minutes. This project is now producing revenues, but is 
not yet profitable.
    Unfortunately, the tax is clearly impacting the way that 
OsteoMed and countless other companies select future R&D 
projects. For some companies, the device tax has already led to 
significantly reduced spending on research and development. For 
others, it has led to a freeze on hiring and expansion 
projects. Finally, many companies have made the painful 
decision to let employees go. Unfortunately, at OsteoMed we 
have done all three.
    Supporters of the medical device excise tax claim that the 
nearly 30 million new covered beneficiaries will use more 
medical devices, and tax will be offset. This is simply not the 
case. Many medical devices are products that are used on a 
variety of patients.
    For example, automated external defibrillators are found in 
public places like airports, shopping malls, and here in the 
halls of

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Congress. If a person goes into cardiac arrest today, he or she 
will receive the treatment regardless of their insurance 
status.
    At OsteoMed, our products are used in trauma and 
reconstructive procedures. We are fortunate to live in a great 
country. People with injuries to the head, face, and 
extremities are able to receive our products. Sadly, our 
ability to continue to innovative on these products is 
threatened.
    There are numerous published reports regarding the impact 
of the medical device excise tax. One report suggests that 
nearly 45,000 jobs will be lost as a result of the tax. I am 
here because I am concerned over 40 jobs in particular.
    These are the 25 members of the OsteoMed family that had to 
be let go because of the medical device tax. In addition, there 
are more than a dozen future planned positions that now will 
not be pursued at OsteoMed. In the 22-year history of our 
company, we have never had to lay off an employee, much less 
for a government-related tax. Therefore, Congress must do 
everything it can to eliminate this devastating tax. Tens of 
thousands of patients who use our devices are relying on your 
leadership.
    Nearly 300 employees and their families at OsteoMed are 
ready for this barrier to be removed in order for us to 
continue to improve health care. We must do everything in our 
power to ensure that this great American industry remains a 
truly global leader.
    Thank you again for this opportunity to testify before you, 
and I'm happy to answer any questions later.
    [The prepared statement of Mr. Humann follows:]

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    Chairman BOUSTANY. Thank you, Mr. Humann.
    Mr. Kautter, you are recognized for 5 minutes.

  STATEMENT OF DAVID J. KAUTTER, MANAGING DIRECTOR, KOGOD TAX 
CENTER, AMERICAN UNIVERSITY, EXECUTIVE-IN-RESIDENCE, DEPARTMENT 
                   OF ACCOUNTING AND TAXATION

    Mr. KAUTTER. Chairman Boustany, Ranking Member Lewis, and 
Members of the Subcommittee, thank you for the opportunity to 
testify today.
    My name is David Kautter. I am Managing Director of the 
Kogod Tax Center located at American University.

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    The Kogod Tax Center is a tax research institute focused on 
promoting balanced, non-partisan research on tax matters, 
including complexity.
    Primarily, we focus on middle income taxpayers, small 
businesses, and entrepreneurs.
    I have been a tax practitioner for over 40 years, and prior 
to joining the Kogod Tax Center, I was the Director of Tax at 
Ernst & Young.
    Over the course of my career, I have watched the Internal 
Revenue Code grow increasingly complex in its structure, 
incomprehensible in its nature, and pervasive in its effect on 
economic decisions.
    It is estimated that the Internal Revenue Code and 
regulations are over nine million words in length, and 
Americans spend more than 6.1 billion hours a year filing 
Federal tax forms.
    The more than 45 tax related provisions in the Affordable 
Care Act will not make things any easier.
    I will focus my testimony today on two particular 
provisions, the new tax on net investment income, and the new 
Medicare tax on wages.
    The statute proposed regulations and preambles for just 
these two provisions are over 48,000 words in length, take up 
over 85 pages in the Federal Register, and are estimated to 
increase the time taxpayers will spend on compliance by well 
over two million hours.
    The tax on net investment income constitutes a new third 
tax system within the Internal Revenue Code. It is its own self 
contained tax system which sits along side the regular income 
tax and the alternative minimum tax.
    Like the regular tax and the alternative minimum tax, this 
new tax system comes complete with its own unique set of 
definitions, rules for computing the tax, and a threshold that 
is not indexed for inflation.
    This new parallel universe also comes complete with its own 
set of new compliance obligations, additional tax forms, new 
tax calculations, and new estimated tax requirements.
    Compliance with these rules will not be a task for the 
faint hearted.
    From a tax planning point of view, taxpayers are already 
focused on simultaneously managing two entirely new 
calculations, modified adjusted gross income and net investment 
income.
    This is just the beginning. Make no mistake about it. 
Planning to minimize and comply with the tax on net investment 
income will consume tens of thousands if not hundreds of 
thousands of hours every year for the foreseeable future.
    That would be in addition to the two million hours of 
compliance time, and that will be in addition to the 6.1 
billion hours already being spent complying with the Federal 
tax laws.
    The additional tax on Medicare wages increases tax 
complexity in three ways, and they are all first's. It is the 
first time the Medicare tax is computed on an individual's 
personal tax return. It is the first time the Medicare tax is 
imposed solely on employees without a matching employer 
payment, and it is the first time that

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the amount of the Medicare tax will vary with the taxpayer's 
marital status.
    These are by no means trivial changes. They bring with them 
new rules for computing and paying Medicare tax, new 
withholding rules, and plenty of opportunities from mistakes 
and penalties.
    The areas of complexity that concern me the most with 
respect to the new Medicare tax are the rules relating to 
withholding and the potential for the imposition of penalties.
    The rules are just too complicated. Mistakes are going to 
be made, and substantial penalties are going to be imposed.
    I am also deeply concerned about the complexity and burden 
this new law creates for small employers. Just like the tax on 
net investment income, it is already clear that employees and 
their employers are seeking to alter the behavior in response 
to this tax.
    I will conclude my remarks by saying a few words about a 
common feature of both these taxes, and that is their 
imposition on income in excess of a threshold.
    A taxpayer's income can increase substantially in one year 
due to an once in a lifetime event, such as the sale of a long 
held asset or the payment of a bonus that took several years to 
earn.
    In situations such as these, taxpayers are taxed at higher 
rates on income that accrued over a lengthy period of time, and 
may never occur again in the taxpayer's lifetime.
    Taxing such one time gains at higher rates contributes to a 
perception of unfairness and tends to increase cynicism on the 
part of taxpayers.
    Not only that, in addition to the new thresholds for these 
two provisions, two other new thresholds come into effect this 
year, the so-called ``PEP and Pease threshold,'' and the 
threshold for the top individual tax rate of 39.6 percent.
    With three new thresholds, complexity is not arithmetically 
increased by a factor of three, it is increased exponentially 
because all three thresholds interact with each other.
    The problem is made even more challenging because each of 
the thresholds that come into effect this year start at 
different levels of income and penalize married taxpayers 
compared to single taxpayers.
    That concludes my prepared remarks, Mr. Chairman. Thank you 
very much.
    [The information follows: Mr. Kautter]

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    Chairman BOUSTANY. Thank you, Mr. Kautter.
    Ms. Sun, you are recognized for 5 minutes.

  STATEMENT OF SHELLY SUN, CEO AND CO-FOUNDER, BRIGHTSTAR CARE

    Ms. SUN. Thank you, Mr. Chairman, Members of the Committee, 
for this opportunity.
    My name is Shelly Sun. I am the Co-Founder and CEO of 
BrightStar Franchising. I am a member of the Board of Directors 
of the International Franchise Association.
    BrightStar Care is a franchise system of more than 250 
independently owned and operated agencies that provide home 
care for

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over 10,000 families in 38 states, 160 franchisees employ more 
than 15,000 nurses and care givers.
    My husband and I founded BrightStar over ten years ago with 
$100,000 of our own money, and by guaranteeing $100,000 line of 
credit with our bank with the equity in our home.
    Small business owners take on this type of risk to start 
their businesses, create jobs, and help the American economy 
every day.
    This is supposed to be the American dream as a small 
business owner. Invest money, take a risk, work hard, build a 
business, and pay back what you invested and earn a profit.
    Part of what makes entrepreneurs so special is their 
passion for creating and providing opportunity for others. This 
law jeopardizes the ability of small business owners to create 
more jobs and reinvest profits back into their businesses.
    Small business owners must make difficult decisions every 
day to protect their personal investments and their American 
dream, and this law will compel entrepreneurs to do what it 
takes, including reducing hours of their employees to keep 
their business and their dream alive.
    One of the biggest challenges we have with the law is how 
it redefines ``full time employees.'' Business owners in every 
sector of the American economy have for decades managed their 
workforce to the current standard of 40 hours per week.
    When Congress set the definition as 30 hours per week, it 
forced employers to manage their workers to fewer hours. Thus, 
reducing the earnings potential of hundreds of thousands of 
employees.
    Because the law requires everyone to have insurance, part 
time workers will have to buy insurance on their own or through 
an exchange. That expense will impact their personal family 
budget as well as demands on Medicaid.
    Clearly, these are unintended and significant consequences 
of a law that was supposed to expand opportunities for health 
coverage to all.
    Simplifying the definition of ``full time'' would provide 
small businesses with more certainty, allowing them to better 
control costs, and make long term business plans for future 
growth.
    Fifty-five of my BrightStar franchisees are considered 
large employers under the Affordable Care Act. The rest are on 
pace to grow to that level in the next two to five years.
    Thus, our franchisees, like many other successful small 
business owners across the country, find themselves in a Catch-
22. They want to expand but if they do, they get hit with 
significant new health care and compliance costs that impede 
growth.
    In this context, it is absolutely staggering to think that 
as defined by the Affordable Care Act, an employer with 50 full 
time employees is in the same category as an employer with 
5,000 full time employees. We can absolutely do better.
    If the 55 BrightStar franchisees who qualify under the 
current definition of ``large employer'' maintain their current 
scheduling level and all eligible employees enroll for this 
affordable coverage, the average franchisee will spend $127,000 
providing this coverage. This wipes out 50 to 100 percent of 
the franchisees' profit.

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    How can we ask small business to risk more, work harder, 
and invest further with administratively complex and expensive 
legislation like the Affordable Care Act?
    We cannot. We must remove obstacles, and we must understand 
small business owners will find a way so they remain in 
business and protect the jobs they can offer. What choice do 
entrepreneurs have if they want to remain in business?
    My two requests today on behalf of my business, on behalf 
of the 160 BrightStar franchisees and their 15,000 employees 
across the country, and on behalf of the franchising community 
and small businesses everywhere, first, change the definition 
of ``full time employee'' to more closely align with the 
current standard of 40 hours per week, setting the definition 
as 30 hours per week simply forces employers to manage their 
workers to fewer hours.
    Second, define ``large employer'' as one with at least 50 
full time employees instead of full time equivalents.
    This simplifies the complexity of the law and a huge 
administrative burden.
    Specifically, this change reduces the 55 BrightStar 
franchisees impacted by the unintended consequences of the 
Affordable Care Act down to eight.
    Thank you again for the opportunity to be here with you 
today to work together to prevent the devastating, unintended 
consequences the Affordable Care Act will have on small 
businesses, employees, and the American economy.
    Thank you.
    [The information follows: Ms. Sun]

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    Chairman BOUSTANY. Thank you, Ms. Sun.
    Mr. Joyce, you are now recognized for 5 minutes.

     STATEMENT OF HUGH JOYCE, JAMES RIVER HEATING AND AIR 
                      CONDITIONING COMPANY

    Mr. JOYCE. Mr. Chairman, Ranking Member Lewis, and members 
of the Oversight Subcommittee, thank you for having me here 
today.
    I am Hugh Joyce, and I own and operate a heating and 
cooling business with approximately 152 employees in the 
Richmond, Virginia area.
    I come before you today to express my continued concerns 
regarding the new health care law, specifically the negative 
impact

[[Page 56]]

and the overwhelming confusion regarding the 47 tax provisions 
in the law and their implementation.
    In the spirit of full disclosure, I personally lobbied 
heavily against this bill. Not because I did not want to pay 
for insurance, because I was already doing that, but because I 
felt the bill lacked provisions to drive down true costs.
    There are lots of lines of code that are spread around who 
is paying for the insurance. There is this Government kind of 
thing, but there is little that addresses insurance pooling, 
personal incentives to maintain health, standard insurance plan 
design, hospital costs and competition, market transparency, 
doctor monopolies on care, individual purchase models, and 
strategies.
    There are 47 tax related provisions that hurt businesses, 
families and workers. Keeping up with the implementation of the 
regulations will be costly, time consuming, and difficult.
    Employers like me must track and monitor employee hours, 
report, verify insurance coverage, all diverting valuable 
resources from productivity.
    Key areas of concern are the mandated coverage's in 
indirect taxes that are driving costs up and affordability 
down. The significant new taxes on investment and pass through 
income reduce capital and limit the ability to expand and 
create jobs.
    Reporting, tracking, and paperwork is daunting, especially 
for smaller businesses, and confusion.
    Finally, the lack of simplicity. Look at our greatest new 
world companies, Apple, Google, Geico, JetBlue. They are all 
successful because they keep it simple.
    I have great concerns that this health care plan and this 
health care act are so complicated.
    Since 2009 and its enactment, our insurance premiums have 
risen from $664,000 to $924,000, with a flat head count. We are 
projecting our renewal premium for this year to be $1.9 
million, an 18 percent increase, which includes a two percent 
premium tax on our fully insured product.
    These numbers are not sustainable over time. Our entire 
discretionary net profit will be absorbed by health insurance 
costs in 5 years, if the current premium trajectory continues.
    Fear is the most crippling emotion. I am convinced that 
fear coupled with the uncertainty of new costs and frustration 
regarding the health care law is a key reason we are not seeing 
robust hiring and job creation today.
    As I look across my competitive landscape, I see major 
disparities. My average competitor is less than five employees, 
if they provide insurance, they get a subsidy. My competitors 
with less than 15 employees do not have to do anything.
    I am over 100. I am required to provide insurance and pay 
for it or I face penalties. Should not everyone be subject to 
the same rules?
    If we want to lead in a global competitive platform and 
keep insurance affordable, we must revisit this health care law 
and the tax provisions.
    This can be done. I think we can provide health care 
without major new tax increases and burdensome compliance 
measures.

[[Page 57]]

    Let's look at strategies for a simplified plan that reduces 
costs, opens up market competition and transparency, and 
provides every American with great benefits that they can buy 
on their own.
    These strategies will provide certainty for the private 
sector and help us grow our economy.
    [The information follows: Mr. Joyce.]
    
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    Chairman BOUSTANY. Thank you, Mr. Joyce.
    Dr. Van de Water, you are recognized for 5 minutes.

STATEMENT OF PAUL N. VAN DE WATER, PH.D., SENIOR FELLOW, CENTER 
                ON BUDGET AND POLICY PRIORITIES

    Mr. VAN DE WATER. Mr. Chairman, Ranking Member Lewis, and 
Members of the Subcommittee, I appreciate the opportunity to 
appear before you this morning.
    The Affordable Care Act will extend health insurance 
coverage to 27 million people and help assure that Americans 
have access to affordable coverage, and it will do so in a 
fiscally responsible way.

[[Page 61]]

    In fact, the Congressional Budget Office has estimated that 
the Affordable Care Act will reduce the deficit modestly in its 
first ten years, but substantially in the following decade.
    The tax provisions of the Affordable Care Act not only 
raise revenue but are also sound health and tax policy. Some 
provisions will encourage consumers to be more cost sensitive 
in purchasing health insurance and health care services.
    Among these provisions are the inclusion of the cost of 
employer sponsored health coverage and on W-2 forms, the excise 
tax on high cost employer sponsored coverage, and limitations 
on the use of tax advantaged accounts to pay for health related 
expenses.
    The Affordable Care Act also levies taxes or reduces 
Medicare payments to businesses in industries that will 
directly benefit from health reform. The taxes on drug 
manufacturers and importers, medical device manufacturers, and 
health insurance providers fall into this category.
    Two other new taxes will affect only the wealthiest 
Americans who have the greatest ability to pay: the additional 
hospital insurance tax on high earners, and the new 3.8 percent 
Medicare tax on unearned income.
    Finally, health reform makes health insurance coverage a 
shared responsibility for individuals and employers. 
Individuals who do not obtain coverage for themselves and their 
families and large employers who do not offer affordable 
coverage to their workers will be subject to a tax penalty.
    This structure follows the Massachusetts model of health 
reform, which relies primarily on private health insurance 
plans to provide coverage.
    Taken as a whole, the Affordable Care Act will 
significantly strengthen our nation's economy. CBO estimates 
that health reform will slightly reduce premiums for employer 
sponsored health insurance in the near term.
    For employers with more than 50 workers who account for 70 
percent of the insurance market, CBO estimates the law will 
reduce average premiums by up to three percent in 2016.
    For small employers, the estimated change in premiums 
ranges from an increase of one percent to a reduction of two 
percent.
    All and all, the short term economic effects of health 
reform will be small. Moody's Analytics terms the law's 
economic impact ``minor,'' and says any disincentives from 
higher taxes and fees will ``hardly make a difference.''
    The Congressional Budget Office foresees a small net 
reduction in labor supply, because some people who now work 
mainly to obtain health insurance will choose to retire earlier 
or work somewhat less, not because employers will eliminate 
jobs.
    Even that effect could be partly offset by increased 
incentives to work for people who now face losing Medicaid 
coverage if they work more.
    Over the long run, health reform will have many positive 
impacts on the economy. The lower budget deficits stemming from 
health reform will hold down interest rates and free up capital 
for private investment.
    Health reform will increase labor market flexibility since 
workers will no longer be locked into a job by the need for 
health coverage.

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    Expanding coverage will also improve health outcomes by 
helping people obtain preventive and other health services and 
improving the continuity of care.
    Most important, the Affordable Care Act includes a wide 
array of policies to improve health care quality and reduce 
costs.
    All these factors should enhance the nation's economic 
productivity.
    In conclusion, the tax related provisions of the Affordable 
Care Act form part of a carefully thought out structure to 
expand health insurance coverage and slow the growth of health 
care costs without adding to the budget deficit.
    Any effort to change these provisions must not be allowed 
to undercut any of these critical objectives.
    Thank you, Mr. Chairman.
    [The information follows: Dr. Van de Water]
   
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    Chairman BOUSTANY. Thank you, Dr. Van de Water. We will now 
proceed with questioning of the witnesses.
    Dr. Holtz-Eakin, we have quite often heard ad nauseam that 
the health care law, ACA, reduces the deficit. Is that true?
    Mr. HOLTZ-EAKIN. I think the original cost estimate 
suffered from what are now widely recognized as a lot of budget 
gimmicks, things like the CLASS Act, which has met its demise 
since the initial passage, front loaded premium receipts and 
back loaded spending.
    There were a number of double uses of money like the 
Medicare reductions being used to fund the insurance expansion.

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    I think the answer would be no. The most important thing is 
that our current deficits and the projections are driven by the 
health entitlement programs and their rapid rate of growth, and 
there has yet to be an objective and non-partisan assessment of 
the law that says it will actually bend the cost curve.
    Chairman BOUSTANY. Part of that calculation by CBO with 
regard to the effect on the deficit was largely because ACA 
raises taxes significantly, as you stated in your testimony.
    Mr. HOLTZ-EAKIN. Sure.
    Chairman BOUSTANY. Let's assume for a moment, for the sake 
of argument, that the underlying policy for health care is 
correct.
    As a physician, I happen to believe to the contrary, but 
let's assume for a moment it is correct.
    Let's also take it one step further. Let's assume that it 
is reasonable or wise or good policy to extract $1 trillion 
from the U.S. economy to pay for this.
    Dr. Holtz-Eakin, I want you to comment, and Mr. Kautter, 
looking solely at the methods by which this law raises taxes, 
and I think you both talked a little bit about this in your 
testimony, it raises these new taxes on innovation, innovative 
companies, small businesses, many that are trying to make a 
profit.
    It raises taxes by taxing health insurance premiums, which 
will be passed onto the purchasers of those premiums, raising 
premium costs.
    Employer mandate.
    Are these rational ways to extract $1 trillion out of the 
U.S. economy given we have very sluggish economic growth, 
unemployment that is projected to remain above seven percent 
through 2015, and maybe beyond.
    We are also looking at tax reform. It is no secret that 
this Committee has set a goal to fundamentally rewrite the Tax 
Code to simplify it and lower rates, all to promote 
competitiveness for American companies.
    Is this a smart way to raise taxes? It seems to me ACA is a 
very complex tax bill. We saw added complexity with the Fiscal 
Cliff tax package. We are going in the wrong direction.
    I would like both of you to comment on that.
    Mr. HOLTZ-EAKIN. I certainly would agree, Mr. Chairman. 
This is going in the wrong direction. This is not good tax 
policy. If you look at this by the standard metrics of 
efficiency and equity, these are bad taxes.
    I know Mr. Kautter does not love the excise taxes on 
payroll and net investment income, and I share his concern with 
the complexity and having a third Tax Code.
    I think the health insurer's tax is the worse designed tax 
I have ever looked at. If the Committee wants to raise $8 
billion next year in some way for the insurance industry, you 
could do a lot better than that, and more generally, I think we 
should recognize the importance of broad-based taxes that are 
less discriminatory and less interfering with the economy.
    I want to comment just on this notion of somehow these are 
benefit taxes. Benefit taxation is a well established principle 
in tax policy. Benefits accrue to individuals and taxes are 
paid by individuals in the end, and it is difficult to imagine 
the ACA being a ben

[[Page 65]]

efit tax because the idea was in fact to give low income 
Americans a benefit, which was insurance, very costly, and if 
we make them pay for that benefit, we will un-do the 
redistribution, which is at the heart of the law.
    In the end, it is not the medical device manufacturers or 
the insurer's who benefit from this tax. It is workers, 
shareholders, and customers that ultimately should be looked 
at.
    You cannot defend this on the basis of benefit taxation.
    Chairman BOUSTANY. Thank you. Mr. Kautter.
    Mr. KAUTTER. Mr. Chairman, I am very concerned about 
complexity, and having spent 40 years in the trenches helping 
all sorts of taxpayers comply with the tax law, I understand 
the complexity matters.
    This bill has got enormous complexity in it with respect to 
the tax provisions. It is sort of like embarking on a great 
archeological dig as you work your way through the pages of the 
bill and now the regulations.
    The tax on net investment income is a brand new third tax 
system. This Committee and other committees have wrestled with 
the alternative minimum tax and indexing the alternative 
minimum tax.
    The net investment income tax is similar to the AMT. It has 
its own separate definition of income, its own method of 
allocating expenses to that income, its own method of 
calculating the tax. It determines which other taxes are 
creditable against that tax. It is a free standing separately 
contained system in the Internal Revenue Code.
    I guess folks can discount it by saying well, only the top 
four percent or so of all taxpayers will pay the tax, a lot of 
those folks invest and innovate, and from a complexity point of 
view, it is a large step backwards.
    Chairman BOUSTANY. This Subcommittee is deeply concerned 
about the ever rising level of complexity in the Tax Code, both 
from the standpoint of those who are taxed, but also from the 
standpoint of an IRS that keeps coming before us asking for 
more resources to deal with this ever growing complexity in the 
Code.
    Mr. KAUTTER. I think the IRS has done as good a job as can 
be done in trying to implement the tax on net investment 
income. They have largely referred to existing provisions and 
standards.
    Unfortunately, the existing provisions and standards are 
not very simple. You now have this new system that refers to 
old principles which were controversial to begin with, and 
these are just two of the taxes.
    The Medicare tax, if someone knows they will be subject to 
the Medicare tax because they and their spouse will earn more 
than $250,000, and they individually earn less than 200, they 
cannot ask to have the Medicare tax withheld from their wages. 
They have to ask to have additional income tax withheld.
    What sense does that make to most people who are trying to 
fill out what is called the ``W-4'' for withholding. It is one 
of the most misunderstood forms and the potential for 
complexity and misunderstanding and penalties is rife.
    Chairman BOUSTANY. Thank you. You pointed this out, I 
think, in your testimony. The net investment tax is referred to 
in

[[Page 66]]

the law as ``unearned income and Medicare contribution,'' yet 
the revenue goes in the General Fund. It does not do anything 
to help Medicare, does it?
    Mr. KAUTTER. It does not. It goes right into the General 
Fund.
    Chairman BOUSTANY. The new law gives the impression that 
there are provisions to help finance Medicare and improve 
Medicare, but are there other examples of that, Dr. Holtz-
Eakin, in this law?
    Mr. HOLTZ-EAKIN. In the end, this law has the flaws of many 
laws that rely on these accounting gimmicks. Money flows into 
the Federal Treasury. Money flows out of the Federal Treasury.
    Any labels attached to them are strictly accounting fiction 
because the money is gone and never saved in any meaningful 
way.
    Medicare right now, the gap between payroll taxes and 
premiums coming in, spending going out, is about $300 billion, 
with 10,000 new seniors every day. That is the true state of 
Medicare's financial condition.
    Any accounting ledger to suggest there is money in a trust 
fund for anything or somehow the Medicare tax will be deposited 
in it is in defiance of economic reality.
    Chairman BOUSTANY. Thank you. That is all I have. Mr. 
Lewis.
    Mr. LEWIS. Thank you, Mr. Chairman. Dr. Van de Water, the 
Affordable Care Act is a landmark law that helped millions of 
Americans.
    For example, 86 million Americans have received one or more 
free check-ups or screenings to prevent and detect illness.
    The Affordable Care Act delivered hundreds of billions of 
dollars of Federal tax credits to many American families and 
small businesses.
    Some have suggested that the ACA is a massive tax increase 
on the middle class. Others have argued the opposite, that the 
ACA is a middle class tax cut.
    The Washington Post did a fact check on the claim that the 
ACA was a middle class tax cut and found the claim to be true.
    Mr. Chairman, I ask unanimous consent to place this article 
in the record.
    Chairman BOUSTANY. Without objection.
    [The information follows: The Hon. Mr. Lewis]

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    Mr. LEWIS. Dr. Van de Water, what is your opinion of 
whether the ACA is a middle class tax cut or tax increase, and 
please explain your opinion.
    Mr. VAN DE WATER. Thank you for asking that question, Mr. 
Lewis. I think it is an excellent one. It illustrates the 
importance of looking at the Affordable Care Act as a whole.
    We have heard a lot of discussion about individual taxes, 
but as I mentioned in my prepared statement, one of the 
important things to remember is the taxes in the Affordable 
Care Act were not levied for the sake of imposing taxes, but 
for the sake of financing the coverage expansions in the law.
    Those are primarily of two sorts: first, the expansion of 
Medicaid for people with incomes below 138 percent of poverty, 
and second, financing the premium tax credits for people 
between 138 percent and 400 percent of poverty. Those premium 
tax credits, by their very nature, go to folks who are middle 
class, defined as having income of no more than 400 percent of 
poverty. And, as I recall, what that Washington Post fact 
check, to which you referred, did was to take a look at was all 
of these provisions together, not just the taxes, such as the 
medical device tax and so forth, but also the effects of the 
premium tax credits that will be provided to help people obtain 
health coverage. And when you look at all of those tax 
provisions together, I think what the Post concluded, and what 
I think is in fact correct, is that that the law does provide a 
net tax reduction for what we might consider to be middle class 
folk.
    Mr. LEWIS. Thank you very much. Thank you. I yield back.
    Chairman BOUSTANY. Ms. Black.
    Mrs. BLACK. Thank you, Mr. Chairman. And I want to go back 
to the issue of complexity that the chairman has talked about 
and several of the witnesses have as well. Under the 
President's health care law's employer mandate tax, which I 
think is a very creative title that they give it, a Shared 
Responsibility for Employer's provision, we know that there is 
going to be a fairly complicated regulatory analysis to 
determine what tax you are going to be hit with.
    And I think Ms. Sun mentioned this when she talked about 
deciding the definition of what full time is. So, you are going 
to have to consider in that what employees count as full time, 
what counts as part time, how many hours they worked, whether 
the insurance they provide to employees meets Washington's 
requirements and other sundry of complicated questions that 
will have to be answered. And, of course, we all know this 
starts at the end of the year.
    Now, the answer to many of these questions of course is 
going to be by the rules that are written by the Treasury. And 
I hold in my hand here a temporary set of rules. We do not know 
whether these rules are actually going into effect or not. 
There are 144 pages that I hold here in my hand. These are the 
drafts of the latest version. I think it is also interesting 
that the Treasury Department admitted last week that the health 
care law was, and I quote this, ``Not as artfully drafted as it 
could have been.'' And that the Treasury Department is working 
on fixing those flaws that may be in this new regulation.
    So, my question, and probably the best one to start with, 
would be, Ms. Sun and Mr. Joyce, since you are employers who 
are going

[[Page 71]]

to have to implement whatever comes out in these rules, and my 
question to you is do you feel that given the fact that we just 
right now have temporary rules that you do not even see, not 
knowing what time line is going to be when these rules are 
going to be final, that you will have enough time as an 
employer to be able to implement these provisions as you are 
working within your business and looking at your own budget and 
what you need to do for the year? Ms. Sun?
    Ms. SUN. Thank you, Ms. Black. No, we absolutely do not. 
And we have even engaged through the International Franchise 
Association, bringing in Ernst & Young to try to help us and 
try to help educate our franchisees. But it is a five step 
calculation that I think you need to graduate degrees to try to 
figure out how to even calculate it. And our franchisees seem 
paralyzed to even to try to calculate it because they are 
afraid if they get it wrong, what is the impact going to be.
    So, we see hiring freezes at our franchisees level. We have 
seen an unprecedented level of franchisees turning back in 
territories where in prior years we have had most of our 
franchisees opening two and three locations and employing many 
more people in their local communities, turning those locations 
back in and saying, ``You know what with the Affordable Care 
Act, we just do not want to take on that risk.'' We do not want 
to take on the complexity. We would just potentially want to 
stay under 50 employees and leave the headaches until we can 
hope that we can get to 2014 and everyone realizes what they 
have done. And they see the impacts of what they have done. And 
this is repealed or replaced in some way, in form or in 
fashion, because right now we cannot figure it out.
    And we have the best and brightest of Ernst & Young, which 
my esteemed to my colleague to my right, used to work for, and 
we still have difficulty trying to figure it out and trying to 
help our franchisees figure it out.
    Mrs. BLACK. And, Mr. Joyce, before you answer let me just 
add one more question to Ms. Sun since she brought this up 
about hiring a firm to give you some advice. Have you any idea 
or calculation of what that might cost you in hiring this firm?
    Ms. SUN. We have estimated, and we have done a pretty 
thorough calculation, we have estimated it will cost each of 
our 160 franchisees $8,455 for every single one of our 
franchisees just to comply with the law at their current stage 
and size of business without even looking at continued growth.
    Mrs. BLACK. And that is complying with the law, that is not 
what it is going to cost you----
    Ms. SUN. So they could figure out how to comply with the 
law, that is what we estimate it would cost them.
    Mrs. BLACK. Okay. Mr. Joyce, same question for you?
    Mr. JOYCE. We agree with those--I agree with her comments. 
And I will just tell you, I was talking to my insurance agent 
last night working through my comp renewal, and I was just 
asking him--we were talking about the Act--and I guess the big 
concern is it is moving so fast there is a lack of information. 
Everyone is making decisions, do I hire, do I not hire? And, as 
I said in my comments, fear and frustration cripple business 
and markets. And the best thing that we can do for our country 
right now is excite

[[Page 72]]

markets and not cripple markets. And I am telling you I believe 
with all my heart that the reason we are not seeing robust 
recovery right now is consternation over small and medium and 
big business with regard to these rules and regulations. It is 
a major concern.
    Mrs. BLACK. Paralysis from not knowing what to do, the 
uncertainty. Thank you, and I yield back the remainder of my 
time.
    Chairman BOUSTANY. Ms. Jenkins.
    Ms. JENKINS. Thank you, Mr. Chairman. Dr. Holtz-Eakin, this 
Subcommittee held a hearing last year that reviewed a provision 
within the ACA that requires a physician's prescription in 
order to gain a reimbursement through tax preferred accounts 
like FSAs and HSAs for the purchase of over-the-counter 
medicines. And some of my colleagues across the aisle claim 
that only the wealthy use these accounts, but I know that over 
19 million families alone use FSAs. What are your thoughts on 
this provision and the impact on families on a budget and the 
burden on physicians who are now seeing patients to prescribe 
something that can be bought over the counter?
    Mr. HOLTZ-EAKIN. Well, I think that it is pretty obvious 
and onerous compliance cost, just making the--getting 
prescriptions impose a big cost on everybody. Past that, when 
you think about the goals of this, if you want to make people 
more sensitive to the kinds of things that they do, it seems 
odd to single out these particular accounts as the way to do 
it. This is a law that has a nearly infinite scope. It touches 
every piece of an American economic life, and to target 
something that has been relatively successful and popular like 
the FSAs and the HSAs strikes me as a really narrow way to go 
at it.
    Ms. JENKINS. Would you consider this a tax on working 
families?
    Mr. HOLTZ-EAKIN. This is a repeal of a clear benefit that 
was in the Tax Code to reach a policy objective, and it is 
going to make their taxes higher.
    Ms. JENKINS. Do you feel that the provision provides in any 
way an efficiency for the health care system?
    Mr. HOLTZ-EAKIN. Again, I think if you want to get genuine 
efficiency you have to do broad-based things, not these rifle 
shots. And I think that would be the way to go.
    Ms. JENKINS. Okay, and on another note, several experts, as 
well as the Congressional Budget Office and the Joint Committee 
on Tax, have estimated that the health insurance tax will 
result in higher health insurance premiums for individuals and 
families. Could you please explain why the tax will lead to 
higher premiums and how the tax is at odds with the ACA's 
stated goal of making coverage affordable?
    Mr. HOLTZ-EAKIN. The way the tax is designed, the fixed 
fee, $8 billion for example in 2014, is allocated among 
insurance companies on the basis of market shares. And what 
that means is that every time you sell another policy, you 
raise your share and thus raise the tax that you have to pay. 
That is just like putting a sales tax on insurance. And we know 
what happens with sale taxes. If at all possible, you try to 
shift that on to the customer.
    This is exacerbated in this case by the fact that for the 
for-profit insurers, those paying corporation income tax, they 
are not allowed

[[Page 73]]

to deduct this tax. So if you have got a dollar of premium tax, 
you actually cannot just raise premiums by a dollar and come 
even because your tax liability is going to go up. So you have 
to actually raise it by $1.54 if you do the arithmetic. That is 
a real upward pressure on premiums that is built into this tax.
    And you might like to think maybe it will magically come 
out of profits, but these are insurers that operate in 
competitive capital markets. They do not have excess profits 
that you can identify. You might want health insurance workers 
to work for less, but I think we are trying to have workers 
have their incomes go up, not down and have more employment. So 
the net effect of this is by and large going to be higher 
premiums, and that is going to get shifted on to probably the 
middle class.
    Ms. JENKINS. Okay, thank you, I yield back.
    Chairman BOUSTANY. I thank the gentle woman. Before I yield 
to Mr. Davis, I want to mention that this Subcommittee did hear 
testimony last year with regard to the Small Business Health 
Insurance Tax Credit and the difficulties that small businesses 
were having in complying with it. In fact, by the IRS's own 
estimation it consumes about 40 million man hours per year, 
which averages out to about 19 hours, man hours, to comply per 
small business. So I thought that was important to mention. 
And, secondly, the projection of the number of small businesses 
that are availing themselves of this tax credit, it has been 
way below what was originally anticipated. With that, I will 
yield to Mr. Davis.
    Mr. DAVIS. Thank you very much, Mr. Chairman. And I want to 
thank the witnesses. Especially, I want to thank you for 
calling this hearing because it gives us an opportunity to look 
at several dimensions of the Affordable Care Act.
    One of the things that I have noted is 105 million 
Americans have had a lifetime limit on their coverage 
eliminated, which I find to be quite commendable, 6.6 million 
young adults up to the age of 26 now have health insurance 
through their parent's insurance, and 6.1 million seniors in 
the donut hole have received savings on their prescription 
drugs. These savings total $5.7 billion overall and averaged 
$706 per senior in 2012. And, of course, these savings will 
continue to grow as the donut hole becomes more fully closed.
    Mr. Van de Water, if I could ask you, I have noted that 
some commentators are concerned that the ACA will lead to a 
significant reduction in the labor market. And while CBO did 
state that the Affordable Care Act will reduce the labor 
supply, CBO believes that this would be due in significant part 
to the end of what is called ``job lock.'' In other words, 
employees would choose to work less or perhaps work for 
themselves because the Affordable Care Act would allow them to 
obtain affordable health insurance from sources other than 
their employer. What is your opinion relative to the effect of 
the ACA on the labor supply?
    Mr. VAN DE WATER. Thank you, Mr. Davis. Yes, you are 
exactly correct in describing the Congressional Budget Office's 
assessment of the effect of the Affordable Care Act on labor 
markets. CBO concluded that, as I think virtually all of our 
personal experience would attest, that there are people, 
particularly those who are approaching their retirement years, 
who may be sort of hanging on to a job, even one that they are 
finding very onerous, because that

[[Page 74]]

is the only way that they can retain health insurance. In some 
cases, even at younger ages, people are not shifting to another 
job if the current job that they have has health insurance but 
the one that they prefer based on other factors does not. So 
the availability of heath care coverage through the exchanges 
on a guaranteed issue basis will eliminate that locking of 
people into a particular job.
    And in the case of some of the older workers, the 
Congressional Budget Office estimates they may decide that they 
will actually withdraw from the labor market a bit earlier, and 
obtain coverage through the exchange instead of through an 
employer. But even the extent to which that happens, CBO 
estimates will amount to a very small drop in employment.
    Mr. DAVIS. I have also heard people suggest that a medical 
device excise tax will shift jobs overseas and investment away 
from the medical device industry in this country. What is your 
opinion of these types of arguments?
    Mr. VAN DE WATER. Again, that is an excellent question. The 
assertion that you referred to is a common one, that the 
medical device excise tax will cause jobs to shift overseas. 
But it turns out that this tax is carefully structured so as to 
avoid that particular effect. And the reason is as follows, 
that the tax does apply to imported medical devices, as well as 
to devices produced domestically, but the tax does not apply to 
exported devices. So that means that if we are talking about 
devices that are going to be used in the U.S., the tax is paid 
whether the device is made domestically or abroad. But if we 
are talking about devices that are to be used overseas, the tax 
is not paid, whether the device is manufactured here or 
overseas. So in either case the playing field between American 
manufacturers and foreign manufacturers remains level.
    Mr. DAVIS. Thank you very much, and I yield back, Mr. 
Chairman.
    Chairman BOUSTANY. I thank the gentleman. Mr. Marchant.
    Mr. MARCHANT. Thank you, Mr. Chairman. It is an honor today 
for me to have a couple of Texans here on this panel. And, 
welcome, thank you for being here today. Mr. Joyce, thank you 
for your statement. I think your statement embodied exactly the 
feelings of every business in my district. I represent a 
district that has Addison, Las Colinas, all the DFW Airport and 
all of the surrounding areas. And throughout the district every 
single owner, every single CEO is sitting down with their 
accountant, sitting down with their insurance agent, and they 
are trying to figure out how they are going to do business next 
year. And that is creating uncertainty and, in your words, it 
is creating fear. And in a business environment of uncertainty 
and fear, you do not have hiring. In fact, you have exactly the 
opposite. So many of these fortunate individuals that will be 
able to stay on their parents' insurance for another couple of 
years, because of the abysmal hiring atmosphere, it may be that 
those very individuals that have stayed on their parents' 
insurance for an additional couple of years actually will not 
have anywhere to go to work after they get out of college 
because the hiring has been frozen, and there is such 
uncertainty.
    During the debate when we--when this Affordable Health Care 
Act was adopted, one of the major arguments the Administration

[[Page 75]]

and supporters gave the companies, and the medical device 
companies specifically, would receive a windfall because there 
would be so many thousands and literally millions of people 
that didn't have insurance, that would have insurance that 
would now begin to access the health care system. And because 
of that, your business, Mr. Humann, your business, Mr. Moore, 
would have so many new customers and would be able to sell so 
many more instruments that your profits would go up. And 
because of those profits, you should help pay for this system. 
So, I would like to give both of you the opportunity today to 
address that argument?
    Mr. HUMANN. Yes, thank you for the question. At OsteoMed, 
we just have not seen that and do not expect to see that. First 
of all, the products that we make patients are receiving 
regardless. There are products that are for trauma and for 
severe reconstruction issues. Secondarily, the majority of 
newly insured patients are younger--younger people, and they 
will likely not be utilizing the medical technologies that are 
out there. And then third, when we look at Massachusetts, which 
has had universal health coverage now for some time, we have 
seen no up-tick in our business in that state whatsoever.
    Mr. MARCHANT. So, basically, in your case, the Medical 
device tax is just a redistribution? It is basically going to 
your company and saying your company or your industry is going 
to pay for the Affordable Health Care Act?
    Mr. HUMANN. It is very simple. It is an extra cost on our 
business. It is one less dollar that we have to invest in 
innovation and new hires within OsteoMed.
    Mr. MARCHANT. Thank you. Mr. Moore.
    Mr. MOORE. And we ask that same question across many of our 
members: is there an expected windfall? And I think coming back 
to that Massachusetts experience, in our surveys 90 percent of 
companies who had been through the Massachusetts experiment of 
universal care did not see a windfall, did not see any growth, 
any greater growth in Massachusetts than they did in the rest 
of the country. So whether you are talking Cyberonics or the 
rest of the industry, we do not expect to see that windfall.
    Mr. MARCHANT. And do you--do either of you expect to be 
able to pass--fully pass on the expense of the tax to your 
customer?
    Mr. HUMANN. The competitive environment is incredibly 
tough. We have foreign manufacturers coming over. We have 
domestic companies that we compete against. We need to look at 
our costs first, and keep all of our options open and try and 
make the ends meet at the end of the day. This is a new cost on 
our business.
    Mr. MOORE. Right, and, as I said in my comments, we see our 
taxes going up with this 2.3 percent revenue tax. Across the 
industry we see our taxes going up 29 percent. We are not 
finding a way that we think we can recover the tax. Quite the 
contrary, we are saying where do we cut in order to find some 
cost savings to offset the tax increase? And those start 
hitting things that we least want to hit. They hit American 
people in the area of jobs. They affect projects, American 
projects, our research and development. And fewer people 
working on fewer R&D projects ultimately impacts in a very 
negative way, ultimately patient care.
    Mr. MARCHANT. Thank you, Mr. Chairman.

[[Page 76]]

    Chairman BOUSTANY. Mr. Paulsen.
    Mr. PAULSEN. Thank you, Mr. Chairman, and also for holding 
this hearing and for our witnesses for all being here today. I 
do share the deep concern that has been expressed by many of 
the members here as well as some of the folks that have 
testified here this morning about how the Affordable Health 
Care Act or the taxes that are in the bill, in the new law, 
have actually contributed to the rising cost of health care. 
And are putting now a heavy burden on some of our best job 
creators, which we just heard about.
    As co-chair of the Medical Technology Caucus and as the 
chief author of the bill to repeal the device tax, I have a 
particular interest in how this tax, this really destructive 
tax, has been harmful not only to American jobs but also 
innovation and also patient care. Now, already we have seen 
thousands of layoffs in this industry. I mean that is pure and 
simple. Thousands of layoffs in this very dynamic, very vital 
industry. It is in Minnesota. It is around the country. The 
President has repeatedly stated his objective to increase 
domestic manufacturing, American manufacturing. And I think the 
irony here is that this is a policy that is actually being very 
harmful to achieving this goal, as our witnesses have already 
pointed out. It is having the opposite effect primarily because 
this is a tax that applies to sales, not to profits. And it is 
going to raise the average tax bill by some companies by almost 
a third. And other countries are absolutely incentivizing these 
companies to makes these products overseas while we are taxing 
and regulating unfortunately our best companies out of 
existence. And so this American success story I think needs to 
be protected. We cannot take that leadership for granted.
    I want to ask this question though, Mr. Moore and Mr. 
Humann. I am so glad you are here to testify about the very 
real effects that the tax is having on your employees and on 
your company and on medical--on the quality of health care, but 
I am wondering whether there are other hidden costs that are 
there as part of this device tax if we dive a little deeper, 
beyond the tax itself? For instance, I know that due to the new 
tax, medical technology companies have to keep track now of 
which products are sold in the United States versus which are 
sold overseas, which products are ``further manufactured,'' 
which are subject to the retail exemption. And on top of that 
the tax is now paid every two weeks, every two weeks, this 
excise tax. And I know many companies have hired full time 
staff just to handle the device tax compliance.
    And I have spoken to some larger companies that sell 
thousands of unique products. Small companies have difficulty 
complying with the new rules. One company said they have 
129,000 products that needed to be individually analyzed, which 
cost the company $10 million on the compliance side, including 
two full time new tax employees, four to six dedicated brand 
new consultants on site for a year and two new IT people as 
well. So that is not on the research and development side. This 
is on the compliance side. I do not think those are the types 
of jobs we should be creating.
    So, Mr. Humann and Mr. Moore, in addition to the $30 
billion in the new tax that you are going to have to deal with 
the next few years and the job loss and the innovation 
struggle, how is it

[[Page 77]]

now--how is it for your companies now to calculate and pay the 
tax?
    Mr. HUMANN. Yes, without a doubt, the tax provides a 
complexity that has not been there before. OsteoMed's whole 
mission in life is to improve patient outcomes. That is what we 
come to work every day to be able to do. And, again, anything 
that we have to spend non-value added time and resources on to 
administrate a tax, to figure out a tax, to pay a tax is one 
less dollar that we have to, again, continue to innovate and 
come up with great new products to help people reduce health 
care costs and ultimately help patients.
    Mr. PAULSEN. Mr. Moore, are there other costs?
    Mr. MOORE. Well, I have seen estimates across the industry 
that reach into the hundreds of millions of dollars, which 
sounds like a lot of money. However, what we know is this 2.3 
percent revenue tax is going to cost our industry $29 billion. 
So hundreds of millions versus the $29 billion, the bigger 
issue is still the device tax. And I think Republican, 
Democrat, there is agreement among many, bipartisan support, 
that this device tax is bad policy, and that it needs to be 
reversed.
    So the implementation at this point is the least of my 
concerns. The bigger issue is we are losing jobs. We are losing 
the American manufacturing and the leadership that we have. It 
is like deja vu all over again, back to my childhood as a son 
of a steelworker. One of the most difficult decisions I have 
had to make is to begin setting up manufacturing for the first 
time in our 25 year history outside the United States. And, 
unfortunately, at this point we have broken ground. I hope to 
limit the number of jobs and get back to creating more jobs in 
America.
    Mr. PAULSEN. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. I want to thank 
you for your leadership on that particular issue, but also for 
raising the question of the complexity in complying with that 
tax, especially for some of our larger companies with complex 
supply chains. It has gotten to be a nightmare. So, I deeply 
appreciate your raising that concern.
    Next, Mr. Kelly, you have got 5 minutes.
    Mr. KELLY. Thank you, Mr. Chairman. And thank you all for 
being here, especially small business owners. My whole life I 
have been involved in small business. My father started a 
business in 1953 after being a parts picker in a General Motors 
warehouse, coming back from the war and starting a dealership, 
a very small store, one car showroom, about four service bays. 
So I know of what you talk. And one of the most fascinating 
things since I have been here is to listen to the opinions of 
those who are not on the field. I spent a little bit of time 
playing football in my life, and I always thought it was much 
more interesting to be up in the stands. I could really pick 
out what people were doing wrong as opposed to being six inches 
from somebody that is trying to take my head off. I watch you.
    And, Mr. Moore, the area I went to school and I would go by 
Gary, Indiana. What a great place it was at one time with all 
the steel mills, and the same in my town of Butler, 
Pennsylvania. We

[[Page 78]]

had great steel mills. We had great railroad companies. We had 
a lot of great things that are no longer there.
    But I think the disconnect here is that people do not get 
it that there is a cost of operation that we keep messing with 
all the time by increasing their tax load. And for some reason, 
Mr. Paulsen just talked about medical devices. You cannot 
increase the cost of your product and hope to compete in a 
global competitiveness where people do not have to play by the 
same rules. It is fascinating to me. One of the biggest items 
we sell right now are cars or navigation systems because people 
do not know how to get from Point A to Point B or they want to 
find the fastest or the quickest or the most use of freeways. 
And I would just tell you that most times it gets a little bit 
confusing, and when it does, a little voice comes on that says, 
``Recalculating.''
    This Affordable Care Act, I mean I cannot imagine something 
being named worse in my life, ``affordable''? Heavens, no. 
Heavens, no. Try and work with it. I mean the people that 
actually have to work it. Get up out of bed in the morning, put 
their feet on the ground and go to work. They are the ones that 
have to struggle with it. And I am fascinated by folks who have 
never done it that can tell you how easy it is. All you need to 
do is get a laptop. I will put the program in for you. I will 
show you how it works. Tell me the struggles that you have just 
trying to maintain your competitive edge.
    And the other thing is one of the things says the employer 
mandate is called the ``Shared Responsibility for Employers 
Regarding Health Coverage Payment,'' which kind of suggests 
that me as an employer all my life, I did not really know how 
to take care of my employees. And that is kind of funny because 
I have been to baptisms. I have been to communions. I have been 
to weddings, and I have also been to funerals. So, I think I 
understand my people pretty well. Tell me some of the concerns 
you have? And I think this is absolutely insulting to tell 
people who have lived their whole life with associates that 
help make them successful that you did not know what you were 
doing, and we have got to tell you because this is an outfit 
that runs so well. We know how to do it.
    Ms. Sun, your business has become very complicated for your 
franchisees, has it not?
    Ms. SUN. Thank you, yes, it has become very complicated. 
And I think the biggest issue we have with having the health 
insurance cost being forced on our franchisees potentially 
before they are ready, we believe in providing health insurance 
for our employees and doing the right thing. We often go to the 
employee--our employees' baptisms and birthdays and funerals 
and new births at the hospitals and when they are sick, but 
many of our franchisees have only been in business for two 
years, three years, four years. Many of them still do not have 
bank loans. And to put a mandate of additional cost on their 
business before they are out of debt and have paid back their 
small business loans to the SBA, I think that is improper. And 
it is not government's place to be telling our small business 
owners how they should be interacting. That is a relationship 
between the employer and the employee. And that is what is 
scary for how the Affordable Care Act is being implemented.

[[Page 79]]

    Mr. KELLY. As I go back in the district, that relationship 
between the owner of the business and the associates that work 
together, as one of you talked about having to lay people off, 
there is nothing worst for an owner than to have to call 
somebody and tell them, ``You know what, we are not going to be 
able to keep you on the payroll anymore.''
    I have got a friend in Erie, Pennsylvania who is in the 
fast food business. He is going to have to reduce his workload 
of people down from being fully employed to part time in order 
to meet this. These are the costs that people who have never 
done it do not get. They think they are so darn smart. What 
they have caused is us to lay off people that we know, that we 
have lived with, that we have suffered with, and that we have 
gotten through tough times with.
    One of you talked about it, 40, they talked about the 40, 
right?
    Mr. HUMANN. Yes.
    Mr. KELLY. That is what is so critical here. We are telling 
those people they cannot work full time anymore, not because we 
do not love them, not because we do not need them, but the 
government has made it impossible for us to keep them on the 
payroll.
    Mr. HUMANN. That is exactly right. They really are family 
members within the company, but the greater responsibility to 
the remaining almost 300 employees that are there. And the 
costs, as they continue to increase, have to be addressed. And 
the tax is a substantial cost.
    Mr. MOORE. Mr. Kelly, if I could, I heard earlier that this 
is not causing jobs to move overseas. Whether you are a company 
of my size, and after 25 years, we have set up our first 
outside United States manufacturing facility, or you listen to 
some of the larger companies, one whom more recently announced 
a $75 million new tax bill, job losses of a 1,000 in the U.S., 
while they are hiring more in China. I connect those two, 
increased taxes and moving jobs outside the U.S. As we get more 
tax burden, we have to find ways to make up for that tax. And 
one way is to move jobs offshore. And I do not like it.
    Mr. KELLY. No, nobody does. I have talked to more people, 
it is not that they are unpatriotic, it is just that they are 
not stupid. They cannot keep their companies open by trying to 
work under a definition, under rules that make no sense. I 
talked to our controller today at the dealership this morning. 
Our costs now, we just got the bids back, $500,000, which is 
nothing in Washington's terms, but for my little dealership, 
that adds to our cost of operation which affects the cost of 
labor. It affects the cost of every product we sell. It affects 
the way we look into the future, and I think that is the real 
bad part of this thing. We do not understand how badly we have 
hurt people's looks into the future with any type of confidence 
that they can survive in an area where the government should be 
your friend. They should be helping you get to a prosperous 
thing. And, you know what, we are just the opposite.
    Mr. MOORE. And we do hear from those governments in other 
countries. I get at least an e-mail a week from another country 
soliciting our jobs.
    Mr. KELLY. Well, thank you for staying the course, and do 
not give up faith. I think we can still get this thing fixed. I 
think we

[[Page 80]]

have got some people thinking a lot more clearly about this, 
but thanks so much.
    Mr. Chairman, thank you so much for having this hearing. I 
think it is so critical that the folks that are actually on the 
ground that face these challenges every day get a chance to 
come before Congress and tell them exactly how hard it is to do 
what they do every single day. And you are the ones that fund 
the whole government. I mean we are killing the goose that laid 
the golden egg. So striking it and keep saying, ``Lay hen, 
lay,'' those days are gone. We better wake up and smell the 
coffee. Thank you so much. And thank you, Mr. Chairman.
    Chairman BOUSTANY. Thank you, Mr. Kelly. I would ask the 
panel to hang around for just a moment. We have two additional 
questioners, Mr. Davis and Mr. Marchant. So, Mr. Davis.
    Mr. DAVIS. Thank you very much, Mr. Chairman. Mr. Van de 
Water, let me ask you. There are those who argue that the 
health insurance industry fee in the ACA will be passed through 
to businesses and consumers in the form of significantly 
increased premiums. These commentators do not seem to 
acknowledge the downward pressure on premiums that the ACA will 
have. Could you please discuss these countervailing factors and 
include in your remarks what the CBO and the ACT believe would 
be the impact on premiums?
    Mr. VAN DE WATER. Yes, Mr. Davis, as you indicate, that if 
taken by itself, the tax on health insurance providers, with 
other things being equal, tends to increase the cost of health 
insurance, there is no question that there are other features 
of the Affordable Care Act, which are designed to increase 
competition and reduce costs. And taking all of those factors 
into account, the Congressional Budget Office has estimated 
that for large employers, those with more than 50 workers, the 
Affordable Care Act overall will reduce average premiums by up 
to 3 percent in 2016.
    For small employers, CBO has a range. They estimate that 
there possibly could be a small increase in premiums of as much 
as 1 percent, but there could be a decrease of as much as 2 
percent. So the middle of that range actually would be for a 
small decrease in premiums, illustrating once again that it is 
important to look at the total effect of the law, not just the 
effect of one particular provision.
    Mr. Davis, if I might, I would like to comment on something 
that was said a moment ago about the Medical Device Tax and the 
effect on jobs, following up with a question you asked 
previously. Clearly, there is no doubt that some medical device 
manufacturers, like firms in other industries, are opening up 
plants overseas, but it has been well documented and it is 
quite clear by the structure of the tax itself, since the tax 
does apply to imported devices that are manufactured overseas, 
the tax itself cannot possibly be a reason to move production 
overseas. There are indeed other cost reasons that apply in 
particular cases that lead manufacturers to make that decision, 
but the device tax itself does not change the balance of cost 
between producing domestically and producing abroad.
    Mr. DAVIS. Let me ask you--could labor supply and 
production costs have something to do with movement?

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    Mr. VAN DE WATER. Presumably, it does. The gentlemen here 
who actually run the companies can speak to that in a way that 
I cannot, but I would also note that there are other device 
manufacturers who take a contrary point of view. And if I 
might, I would just like to quote a couple of them. A fellow by 
the name of Martin Rothenberg, who heads a device manufacturer 
in upstate New York, says that the claims that the device tax 
will cause layoffs and outsourcing, his word, not mine, he 
calls these claims ``nonsense.'' The tax, he says, will add 
little to the price of a new device that his firm is 
developing. ``If our new device proves effective, and we market 
it effectively, the small increase in cost will have zero 
effect on sales. It would surely not lead us to lay off 
employees or shift overseas production.''
    Another gentleman by the name of Michael Boyle, who founded 
a device firm in Massachusetts, says that the device tax is 
``not a job killer. It would never stop a responsible manager 
from hiring people when it is time to grow the business.'' So, 
again, I just want to note that there are different views 
within the device industry itself about the effect of the tax.
    Mr. MOORE. You know, in my case I made that decision for 
our company, and I can tell you I made that decision based on 
interactions with the government, primarily driven by another 
tax. After going through the process of a startup company, in 
our first 20 years, we only made a profit, a small profit, for 
one year, but cumulatively we had losses of over $250 million. 
Around year 20, we were not yet profitable and losing $50 
million a year. We needed to do something. Now, five years 
later, we have some profitability, but we still have net 
operating losses in a successful business.
    When I look overseas, there is another reason beyond 
taxation for opening a plant overseas, there is something 
called country of origin, which says certain countries penalize 
me for being solely a U.S. manufacturer in that they will not 
allow me to go for a product approval in their country until I 
have approval in my home country, where we manufacture. So, 
yes, there are other reasons to set up manufacturing overseas, 
but in our case I can speak to the decision because I am the 
CEO who made that decision to set up in another country, to 
invest millions of dollars to set up a plant in another 
country, to hire our first OUS manufacturing employee who 
starts on Monday. I made that decision based on our situation 
and it is tied to the device tax.
    Mr. DAVIS. Thank you very much, Mr. Chairman.
    Mr. HUMANN. If I could add on that, the device tax in 
general has on average across the industry effectively 
increased the tax--the effective tax rate 29 percent. And so, 
again, every dollar that goes to Washington is one less that we 
can put into our development back in Dallas or throughout the 
industry. At the end of the day, if it makes economic sense for 
a company to look overseas to be able to reduce its overhead, 
they have got to, and this tax certainly does not help in that 
process.
    Chairman BOUSTANY. Thank you. Mr. Marchant.
    Mr. MARCHANT. Thank you, Mr. Chairman. Just a couple of 
comments. Mr. Kautter, your testimony I have read, and I think, 
Mr. Chairman, we might if we had the time, we could have a com

[[Page 82]]

plete hearing just on the idea of this complexity of this law 
and the complexity of this tax changing the absolute behavior 
of investors. I think--I have read through it, and there is one 
page in here that just crystallizes it. And so if you are an 
investor, if you are somebody nearing retirement and you are 
trying to preserve your retirement, you are going to look at 
this, and you are going to change your behavior.
    And, Mr. Eakin, you know that American business and 
American investors will spend a lot of money on tax avoidance. 
And they will spend a lot of money on tax planning. And so I 
commend you for your testimony here. I have read it. It is very 
serious testimony, and I would like to thank Mr. Eakin, for you 
have been on TV a lot the last two weeks and thank you for your 
very commonsense comments.
    But, Mr. Chairman, I would commend you for bringing up this 
subject. This is the exact opposite of what our committee is 
working on. Our committee is working on simplifying the Tax 
Code and lowering tax rates. This does nothing to simplify the 
Tax Code. In fact, it makes it so complex.
    The most alarming figure that I read here today was the 
threshold for trusts and estates is $12,950. That will 
probably--that will completely alter the behavior of those 
trusts in the States, and I contend they will not pay that tax. 
Thank you.
    Chairman BOUSTANY. That figure was alarming when I read 
your testimony as well. And I have gotten a lot--Mr. Marchant, 
I have got a lot of questions about that tax and how it might 
apply, the 3.8 percent tax, net investment--new net investment 
tax. So a lot of my constituents were struggling for some of 
the answers based on the very specific questions they were 
asking me. And even their accountants were confused, but your 
testimony helped us sort of understand generally the level of 
complexity that this has added. And I do agree with you, we 
might need to investigate this further. So I appreciate your 
raising that concern and question, Mr. Marchant.
    With that, I want to thank all of you who have presented in 
front of the committee today and for being here and for your 
testimony. I will remind all the members that if you have 
additional questions, you can submit these, and they will be 
made part of the record. And to the witnesses, there may be 
additional questions that members may want to submit to you. 
So, we will be accepting submissions for the record, which is 
open for two weeks following the hearing.
    With that, this hearing is now adjourned.
    [Whereupon, at 12:50 p.m., the subcommittee adjourned.]


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                    American Farm Bureau Federation

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               National Association for the Self-Employed

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                      The Center for Fiscal Equity


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                        Questions for the Record

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