De­vice­mak­ers push back against re­stric­tions on pass­ing on tax

Pro­posed lim­its on adding tax to prices stir de­bate

Modern Healthcare - - EDITORIAL - Jaimy Lee

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.

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