Medical Device Tax: Will Someone be Left Holding the Bag?

With medical device manufacturers facing a 2.3 percent excise tax on sales beginning Jan. 1, 2013, the question comes up, “Who’s going to get stuck holding the bag?” Will manufacturers take the hit to their bottom line? Will they try to pass along the cost of the tax to buyers? Or will buyers and sellers come together to create efficiencies that will reduce the pain that the tax may inflict on any one member of the supply chain?

Providers expressed their concern that manufacturers will pass the tax through to their customers. In a joint letter to the IRS in late March, the Federation of American Hospitals, the American Hospital Association, the Catholic Health Association of the United States and the Health Industry Group Purchasing Association wrote, “As the [healthcare reform act] appears to permit device companies to deduct the tax from their income for federal tax purposes, to allow device companies also to pass through the tax to their customers would permit a financial ‘double-dip’ that could leave device companies in a better financial position than before the [healthcare reform law] was enacted.”

The provider groups recommended that device manufacturers be required to certify on their federal excise tax returns that the tax was not included in the price of any taxable device sold to customers.

“The pressure on providers and payers to contain healthcare costs is translating into major pricing pressures on device manufacturers,” says Sharad Rastogi, director, healthcare practice, PRTM, a management consulting firm. “As hospitals seek to cut costs and operate more efficiently and new payment models emerge that better align the incentives of physicians and providers, there is a shift in device purchasing decision-making from physicians to hospital administrators,” says Rastogi, author of a 2010 study, “Medical Technology Innovation in a Time of Upheaval.” “These trends will make it difficult for device manufacturers to pass on the device tax costs to purchasers.”

JHC looks at all the angles in its latest issue. To read the article “Left Holding the Bag,” click here