IRS Finalizes Rule on Medical Device Tax

The IRS has issued a final rule to establish a 2.3 percent federal tax on the sale of certain medical devices. The tax is expected to raise $29 billion over 10 years to pay for provisions of Obamacare. There are multiple exemptions to the tax, including custom procedure kits that are assembled in hospitals for their own use  –an exemption that the Premier provider alliance pushed hard for.

Blair Childs, Premier’s senior vice president, Public Affairs, made the following statement:

Members of the Premier healthcare alliance are pleased that the IRS clarified that the medical device tax will not apply to custom procedure kits that hospitals assemble for use in their own facility. Kits are packaged by hospitals and other providers for a wide variety of medical procedures, from the most routine involving a few medical devices, to the most complicated involving several hundred medical devices. Kitting provides benefits to healthcare providers and patients, including increasing patient safety by ensuring that the medical devices needed for a medical procedure are all present and correctly chosen. Kitting also helps healthcare providers to organize their inventory efficiently, with all of the cost savings that entails. With hospitals already contributing $155 billion to the expansion of health coverage, adding this additional tax on providers would have been unacceptable. 

Also exempt are retail consumer items such as eyeglasses, contact lenses, and hearing aids; over-the-counter home use tests; durable medical equipment and prosthetic and orthotic devices that do not require insertion or implantation by a physician; parenteral and enteral nutrients, equipment and supplies; therapeutic shoes; and supplies “necessary for effective use of DME,” among others. Sales and upgrades of software associated with a device also are exempt from the tax if the software is not required to be separately listed as a device.

Pretty clear? In fact, more misinformation circulates about this tax than any other I can think of in recent memory. The medical device tax in the Act is “just 2.3%,” but it’s a top line tax on sales, so when applied to corporate earnings it translates to a whopping 15%. Go ahead and throw in Federal and State taxes and you’ve bumped the aggregate tax rate on US medical device companies somewhere in the neighborhood of 55%.  Regardless of your reform politics, it’s a fact that the venture community’s investment appetite for new medical device companies is down to historic lows (off by almost 33%) and analysts estimate that 50,000 medical device industry jobs are going to be lost. Workforce cuts as deep as 5% are ongoing.

The rule is available here with publication Dec. 7 in the Federal Register.

Source: Premier

—Tom Finn

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