Hospitals, GPOs Cry Foul On Industry Attempts To Pass On Excise Tax

Some device firms are trying to pass the 2.3 percent medical device excise tax onto hospitals in the form of price increases; hospitals and group purchasing organizations argue this subverts the intent of the tax provision.

Hospitals and group purchasing organizations are publicly pushing back against attempts by some device companies to institute 2.3 percent price hikes to recoup the cost of the federal device excise tax that took effect in January.

It is not clear how frequently device makers are attempting to raise prices as a direct result of the tax, but hospitals and GPOs say they are concerned about individual instances of the practice that they have observed so far, gathered in survey responses from their members. And at least one small device supplier has reversed its decision to pass the cost of the tax on to hospitals in response to complaints from customers.

The 2010 Affordable Care Act enacted the device excise tax, a 2.3 percent levy on most U.S. device sales, with certain exceptions, that took effect this January. There is nothing in the law or in Internal Revenue Service rules that prohibits device companies from passing the cost of the tax to customers, but hospitals say the price increases go against the intent of the law and are a troubling sign. (See (Also see "Final IRS Device Tax Rule Changes Little From Draft As Industry Focuses On Repeal Effort" - Medtech Insight, 10 Dec, 2012.).)

“It is important to note that some device manufacturers are taking responsibility for this tax, but there are some attempting to pass this obligation on to hospitals,” said Jody Hatcher, president and CEO of Novation, the largest U.S. group purchasing organization, in a statement emailed to “The Gray Sheet.” (See (Also see "News In Brief" - Medtech Insight, 28 Jan, 2013.).)

“Novation, along with our member hospitals, firmly believes that Congress intended the tax to be paid by device manufacturers – not hospitals or taxpayers – and that it is the sole responsibility of the device industry.”

Hatcher says the GPO has seen letters and invoices sent to its member hospitals documenting instances when a supplier or manufacturer directly notified customers of plans to add the tax to product prices and cases where a 2.3 percent price increase was included without explanation.

“The vast majority of these letters/invoices are from suppliers who do not have a Novation contract, but rather have a local contract with the hospital,” Hatcher wrote.

Three Examples, One Reversal

Tim Ingram, director of materials management with Longmont United Hospital in Colorado, said he has come across at least three device manufacturers or suppliers referencing the device tax in a notification of product price increases.

One of those firms, however, has since reversed course.

A letter dated January 2013 from Briggs Healthcare Chief Financial Officer Tom Young, references the 2.3 percent tax that took effect Jan. 1, and notes, “Accordingly, Briggs is beginning to collect that tax. When purchasing qualifying medical devices you will notice a separate line on your invoice equaling 2.3 percent of the purchase price.”

“Please note that your price from Briggs has not changed,” the letter continues. “We are simply identifying and collecting the excise tax amount, which then gets sent directly to the federal government in compliance with the ACA.”

But Briggs, which makes and distributes products such as digital blood pressure equipment, thermometers, disposable obstetrics products, podiatric care, and charting systems, has subsequently changed its mind, Young told “The Gray Sheet.”

“Due to the response from our customers, Briggs has reconsidered its position and we will not continue to invoice the medical device tax to our customers,” the CFO wrote in an email. “We have informed our customers of this change through various emails and other correspondence.”

Another letter sent to hospitals, dated Dec. 14, 2012, is from Stradis Healthcare, a maker of surgical/procedure packs.

“Starting on Jan. 1, 2013, Stradis Healthcare will impose this 2.3 percent tax as a separate line item on all invoices for all non-exempt items we sell,” the letter, signed by the firm’s controller Joan Crowder, states.

Stradis owner Bret Buhler explained to “The Gray Sheet” Feb. 1 that he will continue to pass the tax through to his surgeon customers, to keep company costs low enough to prevent any lay-offs.

In another letter, Conceptus Inc. alerts customers that effective Jan. 1, 2013, the company is implementing a price increase for its Essure permanent birth control device, “the first pricing change since June 2011.” The price hike, Conceptus writes, is “due in part” to the device excise tax, “as well as continued investments in our product such as expanded training programs, customer-focused product design improvements, and consumer awareness programs.”

The company “Determined to raise the price of the Essure permanent birth control procedure after careful consideration of several factors,” Conceptus spokeswoman Cindy Klimstra told “The Gray Sheet.”

“While the new medical device excise tax is one reason for the change, we also continue to invest in our product and services to increase the total value proposition for our customers,” Klimstra stressed. “We listed the reasons in the letter in order to be transparent. Our overall price increase for 2013 was in the low single digits.”

Mostly Small, Mid-Sized Firms

Most firms initiating price increases as a result of the device tax appear so far to be small and mid-sized device companies, according to Novation. In the lead up to the excise tax effective date, device industry analysts and others questioned the prospect of price hikes as a widespread phenomenon in response to the tax, in part because many device markets are sufficiently competitive where a price hike from one firm would likely give advantage to competitors. (See (Also see "Experts Dismiss Price Hikes As Common Device Tax Balancing Measure" - Medtech Insight, 15 Oct, 2012.).)

But hospital and GPO groups suggest that even limited use of the price increase strategy is a big concern.

“Hospitals are a group that committed $155 billion over the next 10 years to help fund the Affordable Care Act,” says Curtis Rooney, president of the Healthcare Supply Chain Association, which represents GPOs.

“It is disheartening to find that some medical device companies have chosen to tack the tax right onto their invoices. We urge all manufacturers to immediately stop passing the medical device tax on to American hospitals.”

GPOs have worked with multiple hospital associations, including the Federation of American Hospitals, the American Hospital Association and the Catholic Health Association to convince IRS to establish a policy restricting device companies from passing on the tax to customers.

In letters sent to IRS in March and May 2012, the coalition requested that the tax agency establish a provision to prohibit device manufacturers from passing the tax through to their purchasers. The approach would “afford manufacturers the benefit of reducing their income by the amount of the tax through a deduction from income,” but would also require device makers to pay the tax as part of their “shared responsibility” commitment to support passage of the ACA, the groups’ May 2012 letter states.

The groups also requested that the IRS require manufacturers to certify on their federal excise tax returns that the tax was not included in the price of any taxable device sold to customers.

“We believe this is appropriate public policy, and reflects the true intent of Congress in establishing the ‘shared responsibility’ network of stakeholders that made passage of the ACA possible,” the coalition wrote.

The IRS, however, did not address the hospital and GPO requests in its device tax final regulations, issued Dec. 5.

Device firms made their first semi-monthly excise tax payments to the IRS Jan. 29, totaling about $97 million, according to industry associations.

Companies made a major push on Capitol Hill to get the tax repealed or delayed before the New Year, but were unsuccessful.

Industry representatives say they are continuing lobbying efforts, and hope to have new repeal bills introduced in both the House and Senate in the coming weeks. (See in this issue, (Also see "MDMA Will Focus On FDA Performance, Device Tax Repeal In 2013" - Medtech Insight, 4 Feb, 2013.).)

[Editor’s note: This story was contributed by “The Gray Sheet,” your source for in-depth coverage of the medical device and diagnostics industry. For more information call 1-800-332-2181. To register for a free trial, click here/ – no credit card needed.]