The Medical Device Tax is Put on Hold

And that is good news…for whom?

JHC-March16-HiResThe year 2015 ended on a bright note for manufacturers of medical products and equipment, as well as providers, as President Obama signed into law the Protecting Americans from Tax Hike (PATH) Act of 2015.

Provisions of special interest to the supply chain include:

  • A two-year moratorium of the 2.3 percent medical device tax.
  • Extension of bonus depreciation through 2019.
  • The permanent extension of the $500,000 expensing deduction per Section 179.

The Journal of Healthcare Contracting asked a handful of GPOs, distributors and manufacturers for their reactions to PATH. Responding were:

  • Cathy Denning, RN, MSN, senior vice president, sourcing operations, Vizient Inc.
  • Cindy Juhas, chief strategy officer, Hospital Associates, a division of Claflin Medical Equipment.
  • David Bussa, executive vice president, The Brewer Company.
  • John J. Greisch, president and CEO, Hill-Rom.
  • Heather Llorca-Kropp, vice president of marketing communications and channel management, DUKAL.

 

Journal of Healthcare Contracting: Please talk about the effect the medical device tax had on your company since it went into effect Jan 1, 2013.

Cathy Denning: Vizient’s position was, and continues to be, that paying the excise tax is the responsibility of the device manufacturer, not the device purchaser. When the excise tax was initially passed, many medical device manufacturers tried to pass it through to customers. Some manufacturers tried to add language into contracts up for bid to cover the tax. Others tried to lump it in with sales tax, which is collectible. We even had one manufacturer send a letter directly to customers who were utilizing a Vizient contract stating this was a required tax and they would begin adding it, as they do sales tax, to the negotiated price.
We were able to mitigate these tactics through our regular negotiation and contracting practices, which include fixed pricing over the term of the contract, an offer evaluation process that includes bid-to-bid and bid-to-market review, and the addition of language to our contract terms and conditions that explicitly states that sales tax is the only tax that may be collected from customers served under the Vizient contract.

Cindy Juhas: Unfortunately, many of the manufacturers already raised prices to account for that tax. I doubt very much they will go ahead and lower prices. So I don’t see much of a benefit for distribution or end-users. [M]anufacturers can now start innovating again, because many said this tax crunch affected their R&D.

David Bussa: The device tax had a significant impact on the entire medical device manufacturing community. It required cost reductions to offset the costs it imposed. One of the fundamental challenges it presented was that it was revenue-based. Regardless of a corporation’s profitability, it was obligated to pay the tax. Startups were especially hard-hit, but established manufacturers also were impacted as new product design budgets had to accommodate the expense in their modeling. In addition, price increases to offset the tax were not accepted and the manufacturers solely bore the costs.

Heather Llorca-Kropp: The implementation of the medical device tax only affected certain products in our product line; however, the products in question were highly commoditized and contracted, which impacted our margins on those products. DUKAL did not pass this tax on to our customers, so it did not impact our top-line business — only our bottom line. It was unfortunate that the tax was so widespread and encompassing of products like ours, which carry low margins. This was not well thought out; at other companies in our industry, many good people lost their jobs who had a higher percentage of product impacted.

 

JHC: How will the two-year moratorium on the medical device tax – which began Jan 1, 2016, and ends Dec. 31, 2017 – affect providers and suppliers?

Denning: We are not anticipating manufacturers will voluntarily lower prices to reflect the tax moratorium. We will continue to expect the best contract value for members, and at a minimum, expect they will use those dollars to invest in product and service enhancements that benefit providers and the patients they serve.

Bussa: We will reinvest the funds into new product and program innovations.

John Greisch: Our work to develop new technologies depends on our ability to take calculated risks and make strategic investments – efforts challenged by the medical device excise tax, which stifles innovation and reduces our ability to invest in R&D. Hill-Rom and Welch Allyn are grateful that Congress passed a two-year reprieve. On behalf of the patients we serve, the providers who care for them, and the distributors who serve the industry, thank you to our friends in the U.S. Congress for taking the lead and ensuring this tax is no longer an impediment to developing important new medical technologies. We look forward to continue working together to permanently repeal this onerous tax.

 

JHC: Do you see any downside to the two-year moratorium?

Bussa: We don’t see any downside to the moratorium. The uncertainty of reinstitution is a concern, however. Therefore, we expect manufacturers to be very conservative when it comes to adding cost to their businesses to avoid having to make cuts again in the future.

 

JHC: What will be the impact of the extension of bonus depreciation through 2019?

Juhas: The 50 percent bonus depreciation part of the bill should help our customers immensely, especially those that depreciate all of the new equipment they are putting into their new facilities.

 

JHC-March16-iStock_000040109386_LargeJHC: Regarding the permanent extension of the $500,000 limit in Section 179, what impact – if any do you expect it to have on contracting and pricing of medical equipment?

Denning: Capital budgets continue to be impacted by the pressures of healthcare reform. Members are more conservative with their money, so the Section 179 deduction on qualifying purchases of capital equipment should bring some relief, especially for small to mid-size facilities.
Since 2005, Vizient has worked with contracted capital equipment suppliers to offer members quarterly savings opportunities via our national group buy program. In 2015, the average savings opportunity offered by participating capital equipment manufacturers was 40 percent off list price on specified products purchased within the quarter. Over the 10 years the program has been in place, these “group buys” have delivered $1 billion in savings to members on a wide range of capital equipment, including angio/cardiovascular equipment, CT equipment, MRI systems, patient monitors and ultrasound equipment. Combining the savings offered through Vizient’s group buys with the Section 179 deduction will enable more hospitals to invest in the capital equipment they need this year rather than delaying purchase to 2017.

Juhas: The Section 179 deduction should promote equipment purchases this year. So, if a customer takes advantage of these aspects of the bill [i.e., the bonus depreciation and Section 179 provision], it could promote increased purchases of equipment. I think this is a big year for construction in the medical marketplace, and customers either have budgets for growth and remodels, or they don’t. I don’t think this will affect the overall growth, but it certainly will help those organizations that are growing.

Bussa: As with the uncertainty in the duration of the device tax moratorium, the lack of confidence in Section 179 being extended had a negative impact on year-end spending. The extension…should help drive the purchase of capital goods in the future.