Healthcare News & Insights

Medical device excise tax: Is it being passed on to your hospital?

Your hospital may want to check its bills from medical device companies. There may be an extra charge on them from the new medical device excise tax that you aren’t responsible for. 

Despite their best efforts, medical device manufacturers weren’t successful in getting Congress to repeal the medical device excise tax. And on Jan. 1, the tax went into effect.

Created to support parts of the Affordable Care Act (ACA), the excise tax is expected to garner $29 billion through 2022. However, the financial burden on manufacturers is supposed to be offset with the increase of newly insured patients, which is expected to total 30 million.

But manufacturers aren’t waiting to see if that happens. Some of them are passing the costs onto hospitals.

No-pass-through rule

Device manufacturers weren’t the only people raising a stink over the tax. Medical groups, including the Federation of American Hospitals, the American Hospital Association (AHA), the Catholic Health Association of the United States, the Healthcare Supply Chain Association (HSCA), and AHA’s Association for Healthcare Resource & Materials Management (AHRMM),  had fears that manufacturers would past the cost onto them.

That’s why, in a public comment letter to the Internal Revenue Service (IRS), they requested a “no-pass-through rule,” which would include an item on Form 720 — the form manufacturers are required to submit payment on quarterly to the IRS — that certified manufacturers “have not included the tax as a component of the price of their products, and therefore have not passed the tax on to their customers.”

The associations felt they had already contributed their share with the continued reductions in Medicare reimbursement.

The “no-pass-rule,” however, didn’t get approved by the IRS.

One request that did get passed though in the regulation was regarding convenience kits that are assembled by hospitals. They currently aren’t subject to the excise tax, reported ECRI’s Health Technology Trends. Specifically, the interim guidance states “a taxable medical device that goes into a domestically-produced convenience kit will be subject to tax upon its sale by the manufacturer or importer, but the sale of the convenience kit by the kit producer will not be subject to tax. Special rules apply to imported kits.”

Pass along charges

Curtis Rooney, president of HSCA, told Health Technology Trends, “What we’re seeing in the market is a handful of manufactures explicitly including the excise tax on their bills.”

Some are even including the 2.3% tax on customers’ invoices. Some of the manufacturers that are doing this include:

  • Solar Biologicals, Inc., in Ogdensburg, NY, a laboratory supply manufacturer
  • Cadwell Laboratories in Kennewick, WA, a diagnostic and monitoring products manufacturer, and
  • Codonics, Inc., in Middleburg Heights, OH, a medical imaging and information management device manufacturer.

HSCA issued a statement on Jan. 25th, urging manufacturers not to pass along the tax to its customers. Rooney encouraged HSCA hospital partners “not to enter into contracts that bill them for the device excise tax.”

What’s the objective?

Why are medical equipment vendors passing the cost to hospitals? After all, it’s not a sales tax. It’s an excise tax that was intended to be paid by vendors.

Aside from recouping losses, one thought as to why vendors are passing along the tax is to motivate hospitals to fight the tax-repeal are for them, proposed Jennifer Myers, VP of ECRI Institute’s SELECT Health Technology Services, which offers supply-chain benchmarking and advisory services for medical equipment.

She also suggested in the Health Technology Trends article that it could be to divert hospital’s attention from the “real issue,” which is negotiations over the actual price of medical devices.

But what many in the hospital industry fear is that many vendors will try to hide the excise tax by just increasing the cost of their equipment to cover the 2.3% tax.

Since the increase isn’t huge, it can easily be hidden as a minor cost increase, which would be difficult for many facilities to track, if it isn’t itemized.

Not all vendors, however, are passing the excise tax onto their customers.

“Some manufacturers have been up-front in saying they’re not going to pass it on and that they’re going to enact cost-saving measures within their own companies,” noted Rooney.

What’s taxable?

Questions still remain in the industry as to what exactly is taxable, and some companies are hiring excise tax analysts to help them figure it out. For example, monitors and latex gloves can have clinical and nonclinical uses, so are they taxable?

To help clear up some of the confusion, the U.S. Food and Drug Administration (FDA) recently updated its online guidance page “Is This Product a Medical Device?”

According to the FDA, a medical device is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is:

  • recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them
  • intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or
  • intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.

Hospitals’ options

There are a few things Rooney suggests that hospitals should do while device manufacturers are duking it out with Congress to repeal the excise tax.

The first is to closely examine their invoices from medical device companies to make sure the tax isn’t being passed on.

Another is to work with their Group Purchasing Organizations (GPOs) when it comes to their contracts to make sure the tax isn’t allowed to be passed on in the contracts terms and conditions.

And finally, hospitals need to realize that it is in no way their responsibility to pay the tax even if they’re billed for it.

The final rule from the IRS was published in the Federal Register on Dec. 7, 2012 and is open for public comment until March 29.

For frequently asked questions about the medical device excise tax, click here.

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