4 facts about the impending medical device tax [Updated]

January 3, 2013

Along with the controversial and highly-debated Supreme Court decision that ruled the Affordable Care Act constitutional comes three new tax provisions will take effect in just 10 days. The three provisions are forecasted to generate $245.4 billion in revenue by 2019 to help pay for the 33 million Americans expected to gain coverage under the new health law. Among the aforementioned provisions is the medical device tax, which has attracted a lot of attention and still remains somewhat unclear about how it will be applied. 

Along with the controversial and highly-debated Supreme Court decision that ruled the Affordable Care Act constitutional comes three new tax provisions will take effect in just 10 days. The three provisions are forecasted to generate $245.4 billion in revenue by 2019 to help pay for the 33 million Americans expected to gain coverage under the new health law. Among the aforementioned provisions is the medical device tax, which has attracted a lot of attention and still remains somewhat unclear about how it will be applied. 

Despite the fact that 17 Democratic senators recently sent a letter to Health and Human Services requesting a one year delay on the provision, we are 10 days out and it appears the medical device tax will be staying put.

Frank Vascellaro asked President Obama during a WCCO-TV interview earlier this month if he would be willing to see the medical device tax delayed. Here is his full response:

President Obama: Uh, no. And here’s why. The health care bill is going to provide those health care companies, 30 million new customers. It’s going to be great for business and they’re doing really well right now and they’re going to get 30 million more customers as a consequence, so this additional tax essentially comes back to them as new customers. I think it’s very important for us to maintain the principal that A.) nobody should go bankrupt when they get sick in this country and B.) the providers of medical services should recognize they’re going to get a benefit from all of these uninsured folks suddenly having insurance and that means they should be willing to do a little bit in order to make that happen. It’s not just medical device folks, hospitals are doing a little bit more because they know now they’re not going to have uncompensated care in emergency rooms, everybody’s going to have some kind of insurance. Doctors, same kind of thing. So this is not unique to the medical device industry. The idea is that when you have 30 million more people coming in, you’re going to make money, you can do a little more to help facilitate and make sure people are getting the health care they need.

According to a statement on the Dental Trade Alliance website, the fate of the medical device tax is tied to the debate on the ‘fiscal cliff,’ taxes and program cuts. The group said it continues to maintain that dental businesses will not benefit from the health reform law and for dental companies the tax is unfair.

The American Dental Association recently obtained new information to help dentists work through the quandary. The organization, one that has urged Congress to repeal this Affordable Care Act tax, has reached the following key points by analyzing the new IRS final regulations that were published in the December 7 Federal Register.

1. Dentists will not be responsible for collecting, reporting, or paying the new 2.3 percent tax.

According to what the ADA has heard from the IRS to this point, dentists will not be considered “manufacturers” of dental devices merely because they perform restorations or assemble and adjust prosthetic devices. These means dentists will not be responsible for applying, collecting, or reporting the device excise tax in connection with the work they do.

2. The tax on “devices” specific to dentistry will in many cases be applied to the materials from which dental devices are manufactured rather than to the customized items supplied by a dental laboratory, whether or not a device is ultimately adjusted and adapted by the dentist for a patient. “Device” is used as a term-of-art since many “devices” would be more commonly described as “products,” “materials,” or “substances."

The regulations do not create a special rule or carve-out for dental devices. Dental devices subject to the tax are those listed by the FDA in the Code of Federal Regulations at 21 CFR 872-DENTAL DEVICES. This is the FDA list that places dental devices into Class I, Class II, or Class III. The ADA compiled list includes each of the items designated a “Dental Device” by the FDA and the FDA subcategory into which the device falls. Subcategories include, for example, “Surgical Devices,” and “Therapeutic Devices.” All devices listed are subject to the excise tax unless they fall under an exclusion.

3. The tax will result in some increased costs for dentists and dental patients.

At this point, there may be some differences of opinion between various stake holders as to how the tax will work. Dental labs and dental supply companies will likely pass the cost of the tax along to their dentist customers. It will be at the dentist's discretion how or if the increased cost of the final product is applied to the cost to patient.

4. Dentists should be alert in reviewing manufacturer and vendor price lists and invoices to make sure that the 2.3 percent tax is not being applied as a general cost increase with respect to all items, but is only being applied in cases where the law so requires.

The excise tax is on the finished medical devices only and not on any individual components used to make the final product. For example, the tax would not be applied to a milled zirconia framework or remitted by an outsource lab providing the substructure, but it would be applied to a finished bridge, and the lab supplying it to the dentist would be responsible for the 2.3 percent tax on the cost to the dentist.

Updated January 3, 2012: We received a statement from Eric Thorn of the National Association of Dental Laboratories earlier this morning to clarify this article's final point with updated information.

"The vast majority of devices made by domestic dental laboratories do not meet the IRS’s proposed definition of a 'Taxable Medical Device,'" Thorn said.

"The excise tax is only applicable to medical devices and materials that are required to be listed with the FDA as a device. This does include many of the component materials used to make the finished dental device as well as imported devices, since they are required to be listed with the FDA as a device. However, the tax will not apply directly to many of the most commonly domestically manufactured devices. For example, the tax would not be applied to domestically produced finished devices such as; crowns, dentures, veneers and orthodontic retainers but the tax will apply to the alloys, porcelains ceramics and acrylics used to make them since those materials are required to be listed with the FDA," Thorn wrote in an e-mail to Dental Products Report.