The Affordable Care Act (ACA) established a 2.3% federal excise tax on medical devices, to be administered by the IRS and Treasury. This tax will pay for some of the costs related to the new law. The tax is effective in January, 2013.
On June 7, the Republican majority U.S. House voted to repeal this tax. But the matter faces a much larger challenge in the Democratic majority Senate. The President has also promised to veto the House bill. Under congressional rules, the only way to eliminate this as a provision of the law is to identify “offsets” that would create another way to raise the same amount of money as the medical device tax.
This tax presents significant risks of tax to both O&P component suppliers as well as patient care facilities. The tax applies to a “finished device” -- so it should not be applicable to components, only fully fabricated devices. In some cases the tax would be paid by a manufacturer that ships a finished product, and in other cases, it would need to be paid by an O&P provider that fabricates all or a portion of the device in their shop.
AOPA has been lobbying Congress for the past year with the objective of exempting O&P component suppliers and patient care facilities from this excise tax.
While AOPA -- and other medical device manufacturers -- support repeal of the entire tax, AOPA feels there is a clearer path, unique to O&P, that could allow for exemption due to language in the ACA law that exempts devices delivered at retail to an individual patient for their own use.
For example, eye glasses and hearing aids are specifically exempted related to the retail, individual patient use provision.
AOPA began its dialog with the IRS and Treasury in early 2011, trying to provide an overview on O&P, how devices reach the individual consumer/patient, and why O&P devices qualify under the retail exemption. AOPA also identified there are existing FDA regulations for medical devices which describe “retail O&P patient care facilities” meaning there is prior identification that O&P is defined as retail.
Treasury published draft regulations in February which seemed to indicate favorable treatment to O&P, seemingly granting AOPA’s requested eligibility for retail exemption -- but leaving a few aspects that required clarification.
AOPA submitted comments to Treasury endorsing Treasury’s preliminary opinion to exempt O&P, but also seeking expansion of the exemption to include manufacturers. The reasoning behind this is that the retail exemption for O&P facilities would be thwarted if the tax were to be applied anywhere higher in the distribution chain -- i.e. if the manufacturers/suppliers were taxed, then the manufacturers/suppliers would likely pass on the cost to the patient care facilities through increased prices. The O&P facilities would have to try to pass these costs onto the patient or absorb the added cost because their are assigned rates of reimbursement associated with billing codes.
AOPA testified at public hearings held by IRS/Treasury in May, reinforcing these same points. The ball is back in the IRS/Treasury’s court. AOPA seems to be confident that there will be some form of exemption for O&P providers and potentially manufacturers as well. But the government’s final decision isn’t predictable or guaranteed to exempt O&P patient care facilities, and the provision to exempt manufacturers is even less certain.
It is interesting that O&P providers could get exempted, but other providers (physician offices, PT clinics) that dispense single patient use devices may not have a similar exemption. Since these other medical entities do not routinely fabricate braces, they probably wouldn’t have to directly pay the excise tax to the government. Rather, it would be the manufacturer that ships them a finished product that would be responsible for paying the excise tax. It is unlikely that the manufacturers will be able to absorb the full cost of the tax, and will likely make adjustments to their pricing.
One of the complicating provisions seems to indicate that the tax applies to the list price of the device, not the selling price (discounted charges). This could be intended to prevent manufacturers from finding creative pricing strategies to try to minimize the amount of the excise tax.