With medical device manufacturers facing a 2.3 percent excise tax on sales beginning Jan. 1, 2013, the question comes up, “Who’s going to get stuck holding the bag?” Will manufacturers take the hit to their bottom line? Will they try to pass along the cost of the tax to buyers? Or will buyers and sellers come together to create efficiencies that will reduce the pain that the tax may inflict on any one member of the supply chain?


The healthcare reform law gave the Internal Revenue Service the authority to impose a 2.3 percent excise tax on the sale of any taxable medical device by a manufacturer, producer or importer. The tax, which will be collected starting Jan. 1, 2013, is projected to generate approximately $20 billion over 10 years, and is intended to be the medical manufacturing community’s “contribution” to healthcare reform.


The law exempts eyeglasses, contact lenses, hearing aids and “any other medical device determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use.”


Like so many things emanating from Washington, the tax could be considered more a work in progress than a done deal. In fact, there’s some question as to whether the law will actually survive at all. At press time, there were numerous bills floating around Congress to repeal it.


No double-dipping


Even as those battles play out, most of the major players – manufacturers, distributors and providers – responded vigorously to the IRS’s proposed ruling on the tax, which it issued at the end of 2010.


Providers expressed their concern that manufacturers will pass the tax through to their customers. In a joint letter to the IRS in late March, the Federation of American Hospitals, the American Hospital Association, the Catholic Health Association of the United States and the Health Industry Group Purchasing Association wrote, “As the [healthcare reform act] appears to permit device companies to deduct the tax from their income for federal tax purposes, to allow device companies also to pass through the tax to their customers would permit a financial ‘double-dip’ that could leave device companies in a better financial position than before the [healthcare reform law] was enacted.”


The provider groups recommended that device manufacturers be required to certify on their federal excise tax returns that the tax was not included in the price of any taxable device sold to customers.


A blow to innovation?


AdvaMed – an association representing medical device manufacturers – has consistently opposed the tax. Nevertheless, it submitted 18 pages of comments to the IRS in March, with promises of more to come.


“AdvaMed has consistently raised significant concerns with the device tax and its potential harm to patients, innovations and the global competitiveness of the industry,” says Christopher White, executive vice president and general counsel. “We believe the device tax is a serious burden for companies struggling to maintain America’s global leadership in the development of medical technology. If implemented in 2013, the tax will undermine our industry’s ability to create and maintain good jobs in the U.S., and worse, will lead to higher costs for patients, undercutting one of the primary goals of healthcare reform.”


That said, in its comments to the IRS, AdvaMed listed as its top priorities:


  • A clear definition of the word “manufacturer.” AdvaMed’s intent is to avoid multiple taxation of the same medical device, says White. That is to say, the association wants to make sure that contract manufacturers and original equipment manufacturers are not taxed twice for the same product. In its comments to the IRS, AdvaMed suggested that the IRS clarify that manufacturing activities “only involve physically transformative activities, including the re-processing or re-manufacturing of taxable medical devices.”
  • Identification of the articles subject to the tax, recognizing AdvaMed’s proposed exceptions (e.g., devices intended for animal use, investigational devices, etc.).
  • Retail exemption consistent with AdvaMed recommendations. “We believe a flexible standard to account for rapid device innovation and migration across sites of care is needed, rather than a list as suggested in legislative history,” says White.
  • Recognition of AdvaMed’s proposed exceptions to taxable “uses” for samples, demo products, etc.


Distributors express concern


Medical/surgical distributors expressed concerns of their own. Like AdvaMed, the Health Industry Distributors Association has gone on record opposing the tax. “We oppose any tax on the healthcare supply chain, because it’s counter to lowering healthcare costs,” says HIDA CEO Matt Rowan. “By raising the underlying cost structure of medical products, the tax is most likely to contribute to an increase in healthcare costs at a time when we are trying to lower them. That’s why we’re fundamentally opposed to it. But it is the law of the land, so we’re faced with making sure it’s implemented in the most efficient way possible.”


In its written comments to the IRS, HIDA made the following recommendations:

  • Exempt kits, packs and trays from the medical device tax. “Without this important clarification, medical devices in kits, packs and trays could be inappropriately taxed twice – first as it leaves the manufacturer, and a second time after it is placed in a kit, pack or tray,” wrote the association.
  • Define “sales price” for purposes of calculating the medical device excise tax as the price for the actual medical device after accounting for the impact of applicable discounts and rebates. Rowan points out that imposing excise taxes on net sales price is a common practice among other industries subject to such taxes.

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