15 things to know about the Medical Device Tax

Initial revenue reports about the Medical Device Tax indicate the tax fell short of its expected revenue in the second and third quarter of fiscal year 2013, generating $913.4 million in revenue compared with the $1.2 billion the Internal Revenue Service expected.

The controversial Medical Device Tax went into effect on Jan. 1, 2013. Here are 15 things to know about the tax.

1.    The Medical Device Tax was issued as part of the Patient Protection and Affordable Care Act under section 4191 of the Internal Revenue Code.

2.    Revenue collected from the tax is meant to help offset the initial investment of PPACA reform costs. It is one of several in a suite of fees applied to big players in the healthcare industry. While the device industry must pay this tax, payers and pharmaceutical companies face similar fees respective of their industry areas.
3.    The tax is a 2.3 percent excise tax on the sale of certain medical devices, payable by the manufacturer or importer of the device. Applicable medical devices are defined in section 201(h) of the Federal Food, Drug Cosmetic Act that are intended for humans.

4.    Known as the retail exemption, manufacturers of devices such as eyeglasses, contact lenses and hearing aids — those which are purchased directly by the general public for individual use — are exempt from the tax.

5.    Over the next 10 years, the tax is projected to bring in approximately $29 billion in revenue, according to the Joint Committee on Taxation. In fiscal year 2013, the JCT estimated the tax would raise $1.7 billion.

6.    The medical device industry has voiced its opposition to the tax since its enactment, saying such an excise tax will force them to cut jobs and will stifle innovation. The medical device tax was also one of the provisions discussed in October 2013 negotiations regarding the shutdown of the federal government.

7.    AdvaMed, the Advanced Medical Technology Association, has been one of the staunchest opponents of the medical device tax. Its reports suggest the device tax will eliminate or move overseas up to 43,000 jobs.

8.    Bloomington, Ind.-based Cook Medical, a medical device company, generated a map displaying the locations of some of the prominent device companies in the country that are pushing to repeal the tax. The map shows such efforts are widespread throughout the country, which former Washington Post journalist Ezra Klein suggested is a prominent reason why the repeal effort has gained traction. "There are a lot of medical device companies in this country, and they're spread out across a lot of states and a lot of cities, and that's given them pull with a lot of different members of Congress," he wrote in a Washington Post report.

9.    Lawmakers on both sides of the aisle have also expressed concerns over the tax, possibly influenced by Mr. Klein's reasoning. While Republicans have largely spearheaded efforts to repeal the tax, a number of Democrat leaders have joined the fight. For example, Sens. Amy Klobuchar and Al Franken of Minnesota have voiced opinions opposing the tax, as the state is home to a number of prominent players, such as Minneapolis-based Medtronic.

10.    Despite the volume of opposition to the medical device tax, critics and legislators have not offered any replacement or alternative options to replace the revenue from the tax.  

11.    The tax was initially partially justified because the medical device industry is one that is likely to see commercial benefits and assumedly increased profits as more individuals gained health insurance coverage under the PPACA.

12.    However, a report from the Congressional Research Service, "The Medical Device Excise Tax: Economic Analysis," says by traditional economic and tax theory, this particular tax is not easy to justify. Generally, it is more efficient to raise revenue from a broad tax base, so differential excise taxes are not typically implemented. The report says excise taxes are often placed on objectives to discourage undesirable activities, such as tobacco taxes, or to fund government spending projects, such as gasoline taxes to finance infrastructural construction. "These justifications do not apply, other than weakly, to the medical device case," reads the report.

13.    The same report negates fears of job losses, predicting any fall in U.S. medical device output and jobs will be no more than 0.2 percent, or approximately 1,200 employees.

14.    Additionally, the tax's effect on the medical device industry will be negligible, especially in terms of profits, the report projects, as only half of devices are taxed, and manufacturers and importers will see a reduction in income taxes due deductions for paying excise taxes, according to the analysis.  

15.    One of the reasons for the monetary shortcomings and potential problems in the tax's future is the lack of a compliance strategy, according to the Treasury Inspector General for Tax Administration. The IRS can't identify the device manufacturers registered with the U.S. Food and Drug Administration that are required to pay the tax and file a Quarterly Federal Excise Tax Return. Furthermore, the TIGTA analyzed 5,107 excise tax returns in the second and third quarters of FY2013 and found nearly $117.8 million in medical device tax discrepancies between revenue actually captured by the IRS and the amount calculated by TIGTA.

More articles on the Medical Device Tax:

House Bill Would Repeal PPACA Medical Device Tax
Bipartisan Group Calls for Funding Bill Repealing Medical Device Tax
Government Shutdown Ends, Deal Doesn't Alter PPACA

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