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4/2/2010

New Health Reform Law Expands Medical Device Excise Tax to Class I Devices


With health reform being signed into law over the past several days, attention is now turning to particular provisions in the 2,700 page bill, especially those provisions that were the subject of last-minute deal making. NAAOP reported last week that the medical device tax that was part of the package of offsets to pay for the cost of expanded coverage had been expanded in the closing days of the debate on the House bill. Since then, NAAOP has heard many concerns from the O&P field on this issue. This update examines this provision in greater depth in an attempt to analyze the potential impact of the provision on the O&P field.

Background: For the past 8 or 9 months, the health reform legislation contained a provision that would impose a new excise tax on manufacturers and importers of medical devices in order to offset the cost of health reform. Congressional leaders justified this new tax as reasonable in light of the approximately 30 million newly insured Americans coming to the market as potential customers for these devices in the coming years. Several different versions of this tax were in play throughout the past several months and the magnitude of the tax went from a total of approximately $40 billion to approximately $23 billion in response to strong advocacy from manufacturers of primarily internal, implantable devices.

All of the proposals during the health reform debate limited their application to Class II and Class III medical devices under the FDA classification system. These are typically implanted devices such as hip replacements, stents, pacemakers, and similar medical devices but also include some orthotics and prosthetics such as cranial helmets. The vast majority of O&P and durable medical equipment were exempt from this tax due to their status as Class I medical devices.

Recent Legislative Changes to the Provision: The Patient Protection and Affordable Care Act (“PPACA,” “H.R. 3590” or what had come to be known as the “Senate bill”), was signed into law on March 23, 2010. The PPACA imposes an annual fee on medical device manufacturers and importers beginning in 2011. Initially, the fee will be approximately $2 billion per year in the aggregate before 2017 and $3 billion after 2017. The fee will be apportioned among companies in the medical device sector based on sales.

However, in the closing days of negotiations in the House, a small group of hold-out Democrats pressed for additional changes to this provision through the Reconciliation package, a bill that contained a number of changes to the PPACA to make it more palatable to the House. This bill came to be known as the Health Care and Education Reconciliation Act (“HCERA”). The goal of these Democrats was to lessen the impact of the tax. Negotiations between senior leadership in Congress and the White House resulted in a compromise proposal that was added to the bill just two days before the bill was brought to a Sunday vote in the House.

The Final Medical Device Tax Provision: Under the compromise, the medical device industry fee in the PPACA was repealed and replaced with a different version of the provision known as an “excise tax.” In this new provision, the magnitude of the medical device tax was lowered from 2.9% to 2.3% annually, and was delayed two years, until 2013. But this change created a deficit in the overall bill that Congressional leaders were not willing to accept unless additional offsets were found. In exchange for these changes, the tax was extended to a larger base, namely Class I medical devices, with little discussion or opportunity for public comment or scrutiny. The vast majority of orthotics and prosthetics, as well as durable medical equipment, are Class I medical devices.

The HCERA did recognize certain devices whose manufacturers are exempt from the tax. These devices include eyeglasses, contact lenses, hearing aids, and “any other medical device determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use.” The Secretary will determine through regulation what this exception encompasses, but it appears that this language could exempt a range of orthoses and related “soft goods” and medical supplies that are routinely sold in pharmacies. Whether this exception extends to the typical types of durable medical equipment and supplies that are sold in medical supply houses our retail DME stores is not yet clear.

Outlook for the Future: The HECRA passed the House of Representatives on March 21st by a vote of 220-210. The Senate debated the legislation for four days and rejected multiple amendments. Two small amendments had to be made due to rulings from the Senate parliamentarian and the bill was brought back to the House for final passage on March 25th. It was signed into law by the President earlier this week.

The fact that application of this tax to Class I medical devices received virtually no public scrutiny or Congressional debate creates an opportunity to describe to policy-makers and the HHS Secretary the impact on O&P and the potential unintended consequences of this tax on Class I medical devices. Since the tax does not apply until 2013, there is some time to mount an education and awareness campaign to inform decision-makers and press for changes to this provision, either through the legislative process in the future, or through the regulatory process as the Secretary determines the scope of the exemptions under the new law.

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