New Excise Tax Applicable to Otolaryngologist Devices

Health care for all is a goal on which politicians, medical professionals and patients can agree. However, the devil is in the details, and one of those details is how to pay for this expanded care.

One provision in the Affordable Care Act (ACA) is a new excise tax on medical device sales. At first glance, this provision is certainly a good source of revenue—it is estimated that the new tax will raise $20 billion by 2019. But the ripples from its impact on medical devices could have unforeseen and far-reaching consequences, not only for manufacturers and importers but also for individual clinical practices.

A New Excise Tax

The new tax, described in Section 9009 of the ACA, applies to businesses that manufacture or import medical devices. The tax goes into effect on January 1, 2013, but is retroactive to any sales made after December 31, 2008. The tax is on total sales rather than profits. (Resellers are not affected.) Because it’s considered an excise tax by the Internal Revenue Service, it isn’t paid for directly by the consumer, although the cost of an excise tax is often added to the product when it’s sold.

Not every medical device is considered taxable. According to the ACA, devices are exempt from the tax if they have been classified as Class II devices under section 513 of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 360c) and are primarily sold to consumers at retail for not more than $100 per unit, or if they have been classified as Class I devices.

This means that many of the devices used in otolaryngology practice may be taxed, although there are some devices, such as bone conduction hearing aids, that are exempt because of their cost (more than $100) to the consumer.

Device manufacturers will report income according to a sliding scale based on the company’s annual gross receipts of device sales:

• Manufacturers with not more than $5,000,000 in annual sales: 0 percent;
• Manufacturers with more than $5,000,000 but less than $25,000,000 in annual sales: 50 percent; and
• Manufacturers with more than $25,000,000 in annual sales: 100 percent.

Clinician Connection

Because this new tax is collected and paid by device manufacturers, it might seem as though it won’t have a big impact on otolaryngologists. According to the Medical Device Manufacturers Association, however, there could be consequences for clinicians. “The way that the act is structured means that it taxes revenue, not profit,” said Brendan Benner, the organization’s vice president of public affairs. “Innovative companies will seek to lower costs, which usually means stopping some research and cutting staff.”

According to Benner, it generally takes between four and seven years for a device to go from initial concept to commercial development—a time when a manufacturer could go through $60 to $100 million in development costs, with no profits coming in. “An excise tax will drastically affect these kinds of companies,” he said.

Raising the cost and timeline of developing new devices could mean that clinicians outside the U.S. might have tools available that are too expensive to market within the country. “Today, the impact might be a higher jobless rate, but down the road, there may not be the same level of technology and devices available,” said Benner.

While the future of the ACA is still uncertain, it’s unlikely that this particular provision will be repealed before going into effect at the beginning of the year.