Keeping Watch on the Medical Device Tax

Tax protests are as old as the Republic. In the 1790s, for example, a group of wheat farmers and whiskey-makers refused to pay an excise tax on “spirits distilled in the United States” that Congress levied to help pay remaining Revolutionary War debt. As a result, in 1794, President George Washington and a militia force of more than 12,000 rode by horseback to Western Pennsylvania as a show of force to put down the “Whiskey Rebellion.”

Modern-day tax protests take all shapes and sizes. Fortunately, protests are generally much tamer today, but can still carry serious consequences. For instance, beginning Jan. 1, 2013, a 2.3 percent excise tax was imposed on sales of “taxable medical devices” by manufacturers and importers as a part of the Affordable Care Act (ACA). While manufacturers are not refusing outright to pay the medical device excise tax, there have been numerous reports that some manufacturers may be trying to avoid the tax by passing the cost burden to others.

Although there are more than 40 taxes found under the ACA, hospitals and other healthcare providers report that medical device suppliers are the only party sending communications indicating that they planned to pass the tax on to their customers.
To shine a light on this issue, the Healthcare Supply Chain Association (HSCA) recently launched a website to raise awareness of supplier cost shifting efforts (www.devicetaxwatch.com). It will also serve as a resource for hospitals and a tool to gather evidence of manufacturers not paying their shared responsibility for healthcare reform.

When Congress originally debated how to pay for the ACA, it included medical device manufacturers in its calculus because Congress believed that manufacturers would benefit from the increasing numbers of insured patients under the Act. The intent of Congress was to appropriately apportion both the benefits and burdens of the law as fairly as possible.

Although HSCA did not take a position on the medical device tax at the time, we continue to believe national healthcare reform is a shared financial responsibility. Hospitals and other healthcare providers have already paid their share. Hospitals committed $155 billion over the next ten years to help fund the ACA through cuts in reimbursement.

Hospitals are now reporting that, although some suppliers are behaving responsibly, other device manufacturers are billing hospitals directly to cover the costs associated with the ACA’s medical device excise tax. That is not right.

In a May 2012 letter to the IRS, HSCA joined the American Hospital Association, the Federation of American Hospitals, and the Catholic Health Association in stating that, “consistent with the legislative intent that medical device manufacturers along with all other healthcare sectors contribute to the cost of healthcare reform, the IRS and Treasury Department should assure that device manufacturers themselves – not their customers –contribute to ‘shared responsibility’ by bearing the economic effect of the 2.3 percent device excise tax, and not passing this through to providers, like hospitals, which thereby increases their total contribution to health reform.”

Unfortunately, the IRS did not respond directly to our comments at the time. In addition, the IRS maintains that it does not have the authority to police against companies that pass on the medical device excise tax.

We applaud those leading medical device companies that have made appropriate adjustments to their operations and found other ways to respond to this tax rather than passing it on to hospitals.

No one likes paying taxes but, with few exceptions, most Americans make sure that the taxes they owe get paid. Imagine if they didn’t.

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Curtis Rooney is president of the Healthcare Supply Chain Association, www.supplychainassociation.org.