Ease the Medical Device Tax Burden

It’s not quite robbing Peter to pay Paul, but the decision by several dozen medical supply and device manufacturers to pass the 2.3% medical device excise tax on to health care providers could have just as significant a financial impact.

The tax applies to the sales of taxable medical devices beginning Jan. 1, 2013, and is part of the Patient Protection and Affordable Care Act. According to Clinton Mikel, a partner at The Health Law Partners, that could have broad implications.

“If you start diving into the weeds of what constitutes a medical device, it becomes apparent that it’s as broad as it appears on its face,” Mikel says. “The exception would be for direct-to-retail patient medical devices; the types of devices you could purchase at CVS without a prescription.”

What will providers do?

Mikel says that most health care providers, especially physicians and physician groups, will either absorb the 2.3% excise tax, or do the economically rational thing and pass it on to either patients or insurance companies.

“It depends on how they’re getting reimbursed,” he explains. “If the reimbursement you’re receiving is based on a certain type of procedure, and part and parcel of that procedure is use of a medical device, or a disposal that might be subject to the tax, then unless that reimbursement goes up, your cost for providing that service has just gone up by 2.3%, and you have no way to recoup that.

Physicians won’t be able to foist the 2.3% cost onto Medicare patients, but they might not be able to pass the cost onto private insurance patients either. According to Mikel, the physician might have a contract with the insurer that prohibits seeking balance payment from the patient.

“Now, if you’re a concierge practice, then the cost will likely get passed on to the patient,” he says.

Not exactly fair, Mikel agrees, but that’s the nature of taxes.

“Someone, somewhere down the line ends up holding the bag,” Mikel says. “Most of the time it’s not the person that the tax is initially levied on. So, to the extent that these devices are incorporated into a physician’s practice, they’re absolutely going to have a cost increase.”

Not self-absorbed

Mikel explains that the reason why medical device manufacturers have indicated they’re not going to simply absorb the tax is that, industry-wise, margins are fairly small.

“It’s not like they’re getting hedge fund venture capital type returns on what they’re putting out there,” he points out.

Industry groups on the medical device manufacturer side indicate that the 2.3% tax is fairly significant, and several large manufacturers have reported the need to lay off staff or restructure operations due to the excise tax.

“Cynically you can question whether this was truly the cause, the device tax, or if it was the change in reimbursement landscape, or change in how the medical industry is evolving,” Mikel says. “But the fact is they’re saying it.”

Mikel likens the medical device tax to similar scenarios that would play out in almost any industry. A federal gasoline tax of 10-cents per gallon is unlikely to be “eaten” by the gas companies.

“Ultimately, you’re going to see a uniform 10-cent increase at the pump,” he says.

What providers could do

Mikel says there are several steps health care providers can take to soften the blow of the additional medical device tax. They can change their practice care patterns, or they could seek out less expensive, but still clinically equivalent, devices. Or, they might seek out alliances to strengthen or leverage their purchasing power.

Physician groups who have attempted to purchase supplies on their own could start looking at the supply chain group purchasing organizations (GPOs).

“Who knows, there could be a stronger push in the industry where [the GPOs are] focusing on catering to small practices, or small as defined by a supply chain organization,” Mikel says. “So, that may be a method where [physician groups] seek to leverage purchasing power that they couldn’t have otherwise done on their own.”

Physicians can also check out the Medical Device Tax Watch website launched by the Healthcare Supply Chain Association. The site serves as a clearinghouse of information for hospitals and health care providers on the medical device excise tax. Mikel says the site is essentially intended to shame companies that are passing on the medical device tax.

“It’s a well done website,” he says. “And it gets the point across.”