July 03, 2012
4 min read

Device taxes: Orthopedists need to understand the broader implications

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Implementation of a new medical device excise taxes provided for in the Patient Protection and Affordable Care Act are on the horizon for year’s end. We can extrapolate its implications to future reductions in our reimbursements for health care services and how we would react.

In early June, the House of Representatives passed a bill repealing this 2.3% excise tax on the gross sales in excess of $5 million, which would be levied on manufacturers and importers of surgical tools, artificial hips and knees, coronary devices and X-ray machines. Although the vote was 270 - 146 in the House, critics believe the bill will not get through the Senate, and President Obama has also said he will veto the bill.

Barring any further congressional repeal and given the recent decision of the Supreme Court upholding most of the Patient Protection and Affordable Care Act (PPACA), the medical device tax will be applied to sales of taxable medical devices by the manufacturer or importer after Dec. 31. The manufacturer or importer of a taxable medical device will be responsible for reporting and paying the tax.

The Congressional Joint Committee on Taxation estimates that the excise tax would raise $29 billion during the next decade. Supporters argue the tax will help cover the increased costs of the PPACA. The tax will apply to gross sales of medical devices and not be dependent on profits.  

Douglas W. Jackson, MD 

Douglas W. Jackson

Concerns about new taxes

In an estimated $140 billion medical device industry, the excise tax has raised some concerns. Opponents argue that the tax will disproportionately impact marginally profitable start-up companies that often bring some of the newest innovations. Others argue that it will also impact small- to mid-sized businesses in a greater proportion than the larger companies.

The medical device excise taxes are a small part of many new taxes and levies coming in 2013 and 2014. Politicians have been careful to call the scheduled taxes “medical device excise taxes.” This avoids calling them “sales tax increases” for funding. Medical devices and innovative products will be taxed as commodities, like cigarettes and liquor.

Another form of price control

The new legislation dissuades medical device companies from giving buyers different prices with rebates and discounts. The proposed Internal Revenue Service rules will impact devices similar to how physicians are controlled in reimbursement on services. There will be indirect penalties for discounting devices, and the devices will be taxed on the highest common sales price that the item is sold. This interpretation may result in certain scenarios where the taxation of device makers could be on income they never earned.

Device makers will try and pass the costs of this tax on to the hospitals and others who buy their products. In the end, for consumers, it probably will mean higher insurance premiums. It is certainly ironic that some of the same hospital chains who initially supported PPACA are now lobbying to escape the effects of the medical device tax. Because of the government’s price controls, Medicare and Medicaid pay fixed rates per procedure, such as a hip replacement. If the device prices increase, then hospitals will have to absorb a higher cost due to the device tax and consequently will have decreased their profits.

Hospital organizations are lobbying policymakers to prohibit the device makers from passing on the tax to their customers, including some hospitals, by requiring certification on tax statements that the device makers have not done so. If companies are prohibited from increasing prices, then they will probably reduce research and development as well as eliminate non-essential jobs. Some larger device makers have already announced and started to implement the possibility of a 5% reduction in their workforce.

A push for repeal

Some bipartisan support for repeal of some portions of the new reform act does exist. However, I wonder if there is enough bipartisan support in the Senate to repeal the excise tax on medical devices. Much depends on if the Republicans can come up with an alternative $30 billion revenue source to try and appease the Senate Democrats. Piece-meal changing of portions of the act have been initiated and orchestrated by special interest groups. Whatever is done — repair, repeal or implement as it is — will make this voluminous legislation more unreadable and difficult to enforce.

Several questions must be addressed, such as, are medical devices a right with entitlements or are they a commodity? Do levies hidden in higher prices make funding the new health care costs more palatable? Are measures, such as repealing one tax out of many tax increases, beneficial? Will Congress continue carving out exemptions as the answer or will it eventually take a total repeal? The special interest groups have been hard at work and some have been successful already.

Most of us will never read the voluminous PPACA document in its entirety and most of us will only realize some of its wide implications as they are enacted.

At this time, our country needs bipartisan compromise and support in a logical manner to prevent many scheduled changes that may be coming in addition to funding the health care reform. The scheduled expiring tax rate reductions and programmed spending cuts, in addition to the increased health care costs, may have significant deleterious changes in the U.S. economy. Real tax reform is needed as well as more meaningful health care reform. Both have remained beyond the reach of the bipartisan wrangling to this point. Many pending budget issues will impact all U.S. citizens in 2013 — and many will hit at the same time.

The stakes and issues for the 2012 Presidential and others elections are crystallizing. Hopefully, 2012 election referendums will not polarize our country more than it is. We need to think carefully about each proposed modification and change before it is put into place. One significant new tax is scheduled on the top producer in the world of new medical device technology, and this new excise tax will be added to the most lengthy and expensive FDA approval process in the world.

For more information:
  • Douglas W. Jackson, MD, is Chief Medical Editor of Orthopedics Today. He can be reached at Orthopedics Today, 6900 Grove Rd., Thorofare, NJ 08086; email: orthopedics@healio.com.