Obamacare FAQ: The medical device excise tax in the Affordable Care Act

DPR addresses common questions surrounding this complex part of the Affordable Care Act, with Fred Freedman, vice president of marketing and member relations for the Dental Trade Association, on hand to offer additional insight into what it means for dental device manufacturers, dentists and patients.

What is the medical device excise tax and what is it supposed to accomplish?

According to Freedman, “the medical device tax is a 2.3% excise tax on all manufacturer’s medical devices sold in the U.S. The funds generated from the tax are supposed to help fund the expense of the new Affordable Care Act.”

When does the tax go to into effect?

It already has. The IRS started collecting the tax on Jan. 1 of this year.

What kind of medical devices does the tax apply to?

Contrary to claims made by several chain email and social media posts in circulation recently, the medical device excise tax does not apply to non-medical items like sporting equipment, tires, coal, and fuel-inefficient vehicles.

Also, it’s important to note that the tax doesn’t apply to the kind devices that consumers – in this case, dental patients – purchase. This means that toothbrushes, floss, and other consumer dental products aren’t taxed through the ACA.

According to the IRS’s final regulations, a “taxable medical device” is one that is listed as such through the FDA under section 510(j) of the Food, Drug and Cosmetic Act, as well as 21 CFR part 807. In the text of the act, this includes devices that “are being manufactured, prepared, propagated, compounded, or processed…for commercial distribution.”

According to 21 CFR part 807, this includes diagnostic devices, prosthetic devices, surgical devices, therapeutic devices, and many other common accessories dentists use.

“Typically all devices found in the local dentist office are subject to the tax, unless that device – or a similar one – can be purchased over the counter. Everything from a handheld mirror to a digital radiography system is subject to the tax,” says Freedman.

“Many lawmakers are surprised when told that the medical device tax includes most items stocked in a dental office; they assumed the tax was levied on manufacturers making the most expensive and technologically sophisticated devices found in hospitals.”

For a detailed look at what particular devices are subject to taxation, check out the American Dental Association’s list of 21 CFR part 872 devices.

To who does to the new tax apply?

While dentists are not directly impacted by the tax, many manufacturers of dental equipment will be. To be subject to taxation, a manufacturer must receive more than 50% of aggregate gross receipts from medical device sales; in particular, companies earning more than $5 million but not more $25 million must connect 50% of sales to medical devices, while those earning more than $25 million must connect 100% of sales to medical devices.

Nevertheless, it remains to be seen if the tax will force manufacturers to pass the additional cost onto dentists and patients, although many – the DTA and the ADA included – feel this is likely the case.

“Simply put,” says Freedman, “it increases the costs of oral healthcare for dentists and ultimately the patient.”

Who is responsible for assessing and collecting the tax?

As Freedman explains, “manufacturers are responsible for assessing themselves and paying the tax to the United States Treasury. Failure to pay the tax can result in severe financial penalties.”

Will the tax affect how dentists and labs are able to work together?

Since many components that dentists use to fabricate customized dental devices are listed in 21 CFR part 872, many have wondered if they will be responsible to assessing the tax. 

According to the ADA, the answer is no. “If any components that the dentist uses to fabricate the devices are on the FDA list, however, the manufacturer or supplier will add the tax and the dentist will pay it at the time of purchase. 

This also means that if a dentist purchases, for example a finished bridge from a domestic dental lab, the excise tax should not be applied to them.”  Many dental laboratories have already sent dentists letters explaining this.

What is the medical device excise tax’s overall impact on dentistry?

To answer this, it’s important to first look at what is the purpose of the entire law, namely to decrease overall healthcare costs and make affordable treatment more readily available to those currently left out under the current system.

Should it have this effect – which remains to be seen – then perhaps the negative impact of the tax on manufacturers will be balanced by the throngs of newly insured Americans seeking treatment and the overall lower cost of doing so. Nevertheless, advocacy organizations in the dental industry like the DTA predict much more harmful outcomes.

“It raises the overall cost of oral healthcare in the United States and has a negative impact on new jobs, making US manufacturers less competitive in the international marketplace for dental products and equipment,” Freedman explains.

“One very important point is that the US dental community provides a lot of attractive manufacturing career opportunities. The wages paid to employees in the dental manufacturing sector enables families to buy houses, send children to college and pay taxes in their communities. These are exactly the types of jobs the US government should be supporting, not hampering with burdensome taxes.”

Will the medical device excise tax hamper innovation as many claim it will?

Again, this remains to be seen. Still, Freedman thinks “overall, less profits and working capital impacts the funds available to perform new research and development. US dental devices are coveted around the world because of the innovative, affordable and reliable qualities of the devices. A higher manufacturing cost due to new taxes translates into fewer devices being sold. With fewer devices being sold, there are less funds available for new research and development.”

Have advocacy organizations like the DTA weighed in on the medical device excise tax?

Yes – loudly and in large numbers.

“The DTA, along with virtually every medical device and healthcare organization, strongly opposes the new medical device tax for many reasons. It increases the cost of healthcare, it impacts new jobs and research, it makes US products less competitive in the global marketplace, and increases the cost of healthcare for the US government, largely because the Department of Defense is one of the largest purchasers of healthcare devices,” explains Freedman.

“It is an unfair tax on small manufacturers, in some cases amounting to a 50% tax on profits. There are very few provisions for dental care in the Affordable Care Act, so the entire oral care manufacturing industry is being taxed but will derive very little in terms of driving new patients to the dentist, or an increased demand for oral care devices in the US.”