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New Excise Tax to Impose Significant Costs On Device Makers, Industry Survey Finds

Wednesday, December 19, 2012

Implementing the medical device tax scheduled to take effect Jan. 1 will cost the industry between $400 million and $667 million in expenses for training, consulting, and system design, according to a survey released Dec. 18 by the Advanced Medical Technology Association (AdvaMed), a leading industry trade group.

The survey, based on responses from 81 AdvaMed members of all sizes, also found that 62 percent of the companies surveyed are planning layoffs or reduced hiring to help offset the costs of the tax.

“This is more proof that the medical device tax will do real damage and it ought to be repealed,” Stephen J. Ubl, president and CEO of AdvaMed, said in a statement.

Included as part of the Affordable Care Act, the 2.3 percent excise tax on medical device sales is a key funding mechanism to help pay for other parts of the law and is expected to bring in nearly $30 billion over several years. The tax would not be imposed on eyeglasses, contact lenses, hearing aids, and other items included in an exemption for retail sales to consumers.

On Dec. 5, the Internal Revenue Service released its final regulation on implementing the tax (234 HCDR, 12/6/12).

Existing Technology Inadequate.

More than 90 percent of the companies surveyed said their existing data system technology was not configured to accommodate the new device tax requirements. Only 7.9 percent of survey respondents said their current technology was “completely prepared” to handle the new tax, while 15.8 percent said they had no existing technology to implement the tax.

Because the tax is structured as an excise tax, medical device companies will need to make tax payments to the IRS each quarter. If their tax liability exceeds $2,500 per quarter, they will also need to make semi-monthly deposits with the IRS, according to an IRS fact sheet.

According to the AdvaMed survey, more than 80 percent of the companies will need up to six months to implement changes in their technology to handle the tax.

Few companies anticipate increased sales as a result of expanded health coverage expected to come from the health care reform law. Only 2.7 percent of the companies surveyed expected their sales to increase more than 5 percent, while 80.8 percent expected sales would increase 1 percent or less.

President Obama recently cited increased industry sales from ACA's expanded coverage provisions as a key benefit for the industry. “The health care bill is going to provide those health care companies 30 million new customers,” Obama said Dec. 13 in an interview with Minneapolis television station WCCO. “So this additional tax essentially comes back to them as customers.”

Industry Repeal Efforts Fall Flat.

Since enactment of ACA in March 2010, the medical device industry has repeatedly called for cancellation or postponement of the tax, with little apparent success.

In June, the House passed a bill (H.R. 436) that would repeal the tax (110 HCDR, 6/8/12). Repeal of the tax appears to lack support in the Senate, however, even though 17 Senate Democrats recently wrote to Majority Leader Harry Reid (D-Nev.) asking that he postpone the tax, saying the industry needed more IRS guidance on how it was to be implemented (238 HCDR, 12/12/12).

The letter, spearheaded by Sens. Amy Klobuchar (D-Minn.) and Kay Hagan (D-N.C.), was also signed by three members of the Senate Democratic leadership: Sens. Dick Durbin (D-Ill.), the Democratic whip; Patty Murray (D-Wash.), Senate Majority Conference secretary; and Charles E. Schumer (D-N.Y.), chairman of the Democratic Policy Committee.

However, their effort lacks the support of Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, who said Dec. 11 he would not agree to a repeal of the tax (238 HCDR, 12/12/12).

For now, Baucus seems to be the dominant figure in the Senate on issues related to the tax. Asked by BNA Dec. 11 about the chances for getting Reid to agree to a postponement of the tax, as she had requested, Murray replied, “You'll have to ask Senator Baucus.”

By Ralph Lindeman  


The survey is at http://tinyurl.com/cbyvmsq. The IRS fact sheet about the tax is at http://www.irs.gov/uac/Medical-Device-Excise-Tax:-Frequently-Asked-Questions.

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