Editor's Note

Repeal the Device Tax

A new law just put the excise tax on a two-year hiatus. Let’s make it permanent.

• By David Kopf
• Feb 01, 2016

When it comes to the Patient Protection/Affordable Care Act, much of the home medical equipment industry’s attention has been fixed on the competitive bidding elements of the law. Of course, I’m specifically referring to the fact that it included provisions for expanding the competitive bidding program’s reimbursement rates to all non-bid areas nationwide. And, as we saw with the Jan. 1 implementation of that expansion, the scenario for providers in those non-bid areas, particularly the rural areas, looks pretty gloomy.

But instead of fixating on the bid expansion provisions of PP/ACA, I want to focus on another component of that law: the creation of the medical device excise tax. The tax was implemented in 2013, and it imposed a 2.3 percent tax that had been on the domestic sales of medical devices in the United States.

That tax had to paid by manufacturers or importers, and it unnecessarily inflated the cost structure of an industry already reeling from multiple reimbursement cuts and costly audits. It also jeopardized patient access to quality care via good-quality equipment, and put them at risk of being stuck with sub-par devices made by questionable overseas manufacturers operating under lower standards.

Well, there is some good news for the equipment makers and their provider customers: the Consolidated Appropriations Act of 2016, which was signed into law on Dec. 18, 2015, includes a two-year suspension of the tax, which runs from Jan. 1 to Dec. 31, 2017.

But this doesn’t just mean relief for the industry — it also means growth. As members of the industry might recall, that 2.3 percent tax meant that manufacturers had to rein in their research and development efforts, hold off on expansion and broad product launches, and hindered the kinds of innovation that could save money while improving outcomes for patients. Now, for at least two years, manufacturers have at least 2.3 percent less to worry about.

The worst part was that the tax wasn’t effective to begin with. The tax was originally forecasted to generate roughly $30 billion — money that would have gone to help fund PP/ACA programs. (The argument was that the more insured Americans, the more demand for equipment, and thusly more revenue through increased volume.)

But that didn’t happen. In fact, during the first half of 2013 the Medical Device Excise Tax raised only 60 percent of the expected amount, according to a report recently released from researchers at GlobalData.

“As well as lacking effectiveness, the tax had many costly consequences for manufacturers, and was particularly crippling to smaller companies, which were forced to face challenges such as layoffs, cuts to research and development efforts, and delayed expansion plans,” Jennifer Ryan, GlobalData’s Analyst covering Medical Devices, noted in a recent statement about the report. “The tax also threatened to seize much of the money spent on product innovation and advancement in the U.S. medical device market, which was already struggling under stringent regulatory and reimbursement procedures.”

That’s not exactly a stellar report card. That expert analysis shows that the excise tax was a bad idea from the get-go. The tax set up a false revenue target, and truncated the kind of technological innovation that can improve therapeutic results while cutting the cost of U.S. healthcare.

So if, as GlobalData predicts, the temporary suspension of the excise tax will have “positive consequences for the U.S. medical device market” over the next two years, why not repeal it altogether?

Global Data notes that a repeal would take the pressure of the smaller and medium-sized manufacturers that were hard hit by the excise tax, and it would foster a return to better quality devices.

You can argue that the repeal can only be temporary, because the PP/ACA will still need whatever tax revenue the tax was bringing in before, but I counter that by arguing that we have the next two years to demonstrate that PP/ACA can operate without the device tax. Moreover, the industry also has those two years to find a pay-for.

The key is to start now to craft the legislation that will permanently repeal the tax, as it was a poorly thought-out and burdensome cost that didn’t need to impact this industry. I urge providers and manufacturers to work with the state associations and AAHomecare to make that repeal a reality.

This article originally appeared in the February 2016 issue of HME Business.