Medical Device Excise Tax Set for Showdown

Medical devices manufactured after December 31, 2012, would be subject to a new excise tax that was included in the Patient Protection and Affordable Care Act (P.L. 111-148).  Estimated to generate $20 billion in tax revenues, the levy of 2.3% on the total revenues of a medical device manufacturer would begin in 2013.  In February of this year, the Internal Revenue Service (IRS) published a Notice of Proposed Rulemaking (NPRM) that would amend the Internal Revenue Code to incorporate the excise tax. 

The excise tax would apply to sales of taxable medical devices made after December 31, 2012 , and attach when a medical device is sold by a manufacturer, producer, or importer.  Existing regulations and authority of both the IRS and FDA would be used for purposes of determining whether medical device contract manufacturers are to be treated as a manufacturer or producer for purposes of the excise tax.  Under the IRS definitions, the term “sale” means an agreement whereby the seller transfers the title to the property or substantial incidents of ownership to the buyer for consideration, including money, services, or other items.  

The device manufacturer would also be liable for the tax at the time of the sale; in the event of a partial payment sale, the tax would be applied to each payment.  The sale price upon which the tax will be assessed would include the total consideration, in any form, paid for the device, including packaging costs.  However, the sale price excludes shipping costs and any warranties or rebates offered to the purchaser.

A number of medical devices would fall under exemptions from the excise tax, including eyeglasses, contact lenses, hearing aids, and other medial devices if generally purchased by the general pubic at retail for individual use – categorized as the “retail” exemption.  Basically, the retail exemption is for devices that are regularly available for purchase and use by customers who are not medical professionals, and the device’s design is such that it is not primarily intended for use in a medical environment.

An exemption also exists for devices that are used by the purchaser for further manufacture or export, such as components, or are used solely for research or teaching purposes and are not introduced into commercial distribution.  A final exemption to the excise tax addresses devices that are used exclusively in veterinary medicine.  However, a device that is used both for humans and in veterinary medicine would constitute a taxable medical device subject to the excise tax.

Device manufacturers have weighed in heavily against the excise tax from the beginning.  The Medical Device Manufacturers Association (MDMA) has argued that the tax would stifle innovation, harm patient care, and weaken the United States’ position as the global leader in medical device innovation.  The organization has also pointed out that there is no data or studies that show the costs of the excise tax will be offset due to an increased pool of insured beneficiaries receiving treatment.  The MDMA believes the majority of products impacted are used in acute care settings where there are legal obligations to treat a patient; thus, the effect of expanded coverage would not increase utilization. 

Conversely, advocates for low- and middle-income families and individuals such as the Center on Budget and Policy Priorities (CBPP) have argued that the tax will not affect innovation in the medical device industry, because spending on taxable medical devices currently represents less than 1 percent of total personal health expenditures.  As a result, increases in medical device prices would not necessarily lead to pronounced increases on health insurance premiums.  Additionally, noting that device manufacturers have stated that manufacturing would shift overseas, the CBPP has argued that the exodus would not occur because the tax applies to both imported and domestically produced medical devices, exempting U.S. exports.

The comment period is set to close May 7, 2012, and a public hearing on the excise tax will be held on May 16, 2012.  The expectation is that medical device manufacturers will still have their say on the matter for the remainder of 2012.