Devicemakers push back against restrictions on passing on tax
Proposed limits on adding tax to prices stir debate
Hospital groups and GPOS are pushing the IRS to prohibit device manufacturers from shifting the cost of the industry’s excise tax to the price of their products. Device manufacturers will be required to pay a 2.3% excise tax on the sales of devices starting Jan 1. The tax is considered the industry’s contribution to financing the Patient Protection and Affordable Care Act.
Providers say the IRS, which issued proposed regulations in February, should prohibit the “pass-through of the tax to purchasers” by requiring manufacturers to certify on their Form 720 excise tax returns that they have not included the tax as a component of the price of their products.
In a May 7 comment letter to the IRS, the American Hospital Association, the Association for Healthcare Resource and Materials Management, the Catholic Healthcare Association of the U.S., the Federation of American Hospitals and the Healthcare Supply Chain Association said passing through the cost of the tax to hospitals and other device purchasers would increase the cost of healthcare.
In a separate letter, Premier also requested that manufacturers be required to certify that the tax has not been included in the price of a manufacturer’s products.
“Hospitals are already contributing their fair share through policies that reduce hospital payment updates and Medicare and Medicaid disproportionate share hospital payments and that penalize hospitals based on rates of readmissions and hospital-acquired conditions,” Premier said in the letter. “We are concerned that the device tax will be transferred, at least in part, to hospitals that purchase taxable devices.”
David Nexon, the Advanced Medical Technology Association’s senior executive vice president, said in an e-mailed statement that Advamed is “puzzled” by the comment letter submitted by the hospitals and group purchasing organizations.
“Like the share of Medicare cuts hospitals shift to privately insured or uninsured patients, the incidence of excise taxes has always been determined by market forces, and there is nothing in the underlying legislation that would allow IRS to micromanage supplier-customer relations in the way the letter suggests,” Nexon said.
The device industry has aggressively fought the tax, which is estimated to cost $3 billion annually.
Advamed President and CEO Stephen Ubl recently called it an “anti-competitive, counterproductive, job-killing tax,” while some studies found that the tax will lead to the loss of jobs and economic output.
A survey conducted by KMPG and released in April found that 61% of financial executives employed at device manufacturers said the tax will negatively affect the company’s bottom line, while 60% of respondents said they believe the tax will increase compliance costs.
However, none of the key stakeholders affected by the tax have been proponents of it, and it isn’t likely that the IRS will require manufacturers to certify that the tax hasn’t been passed through, said Kristian Werling, a partner with Mcdermott Will & Emery. “Some universal concern is that this type of tax will be passed right through to hospitals, GPOS and patients,” he said. Werling noted, though, that he does not expect the tax to deter either devices purchases or the innovation and development of new devices.
Among the recommendations made in its comment letter, Advamed requested that the IRS allow rebates and discounts to be factored into the price of medical devices although it noted the “likely reluctance of the IRS to treat discounts and rebates in the medical device industry differently.” Treasury regulations say that the practice of rebates and discounts, as well as other adjustments in sales price such as bonuses, cannot be anticipated.
A public hearing is scheduled for May 16 to discuss the excise tax.
House members, meanwhile, moved quickly to advance legislation that would reauthorize the drug and device user-fee programs set to expire Sept. 30. The House Energy and Commerce Committee unanimously voted last week to approve the legislation.
Devicemakers would pay $595 million in user fees over five years—more than double the current fees—in exchange for greater interaction between sponsors and the agency, as well as the hiring of an independent third party to review the device approval and clearance pathways. The legislation also includes measures to improve access to the FDA’S accelerated approval pathway for treatments targeting rare diseases and to address drug shortages.