2.3% Device Excise Tax Is Back

After a two-year suspension, the dreaded 2.3% excise tax on medical device manufacturers returned on January 1, 2018.

The tax was originally imposed in 2013 as one of several taxes and fees in the Affordable Care Act (ACA) that pays for expanded health insurance.

The device industry association, AdvaMed, has been fighting the tax tooth and nail and had secured bipartisan support from red and blue state U.S. senators with significant device manufacturers to permanently repeal the tax.

But the Republican majority in the Senate did not include the repeal in the recently passed $1.5 trillion tax overhaul that cut corporate income tax rates 14%, from 35% to 21%.

Wall Street analysts and industry lobbyists have disagreed about the impact of the tax on device makers. Some analysts argued that increasing procedure volumes due to more patients covered by insurance would make the tax a financial wash for most device makers.

AdvaMed argued that the tax would take $20 billion out of the industry over the next decade and hurt innovation and employment. “What we have seen from past experience is that it comes out of funding for product development, research and the jobs associated with those things,” said J.C. Scott, AdvaMed’s head of government affairs. “We fear we will see employment freezes or reductions and a slowdown in the pipeline for medical innovation.”

The Joint Committee on Taxation has reportedly said repealing the medical device tax would cost the U.S. Treasury about $20 billion over a decade. Before it was suspended, the Internal Revenue Service (IRS) collected between $1 billion and $2 billion a year in 2013, 2014 and 2015.

What is not disputed is that because the tax is applied to revenue, not profits, the tax hits newer companies with revenue, but no profits, particularly hard.

Stewart Eisenhart of Emergo says manufacturers should determine whether their devices fall under the FDA’s taxable medical device definition, and thus under the tax’s compliance requirements.

• Any instrument or in vitro reagent recognized by the U.S. National Formulary or the U.S. Pharmacopeia
• Any device intended for use in diagnosing, treating or preventing a disease
• Any device intended to affect human or animal bodily structures or functions in a non-chemical manner

Furthermore, says Eisenhart, any listed medical device that has a three-letter FDA product code falls under the tax’s requirements. Devices that currently have no FDA product codes assigned to them are not subject to the tax.