Healthcare Business News

Price hikes likely

Regs don't keep devicemakers from passing on costs

By Jaimy Lee
Posted: December 8, 2012 - 12:01 am ET

Hospitals will likely pay higher prices for some medical devices as manufacturers seek to pass through the cost of an impending excise tax to providers.

Starting next year, manufacturers will be required to pay a 2.3% excise tax on the sales of certain medical devices. The tax is considered the industry's contribution to financing the Patient Protection and Affordable Care Act.

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In final regulations issued last week on the tax, the Internal Revenue Service did not include a provision that providers requested: a requirement that devicemakers certify they're not passing the cost of the tax to the hospitals and physicians who buy their goods.

Device manufacturers have repeatedly called for lawmakers to repeal what they say is a “job-killing” tax that will hurt innovation. Legislation repealing the tax passed in the House of Representatives last summer, but has not been taken up by the Senate.

However, even as industry groups press lawmakers to repeal the tax, manufacturers may be looking at ways to pass through the cost of the tax to healthcare providers.

“There are only a couple of ways to address the burden of the tax,” said Wanda Moebius, a spokeswoman for the Advanced Medical Technology Association. Those include reductions in research and development investment, restricting future expansion, laying off employees and passing on the tax to customers, she added.

Some manufacturers have reportedly told hospitals they plan to pass through the cost of the tax on the prices of their products, said Michael Rock, senior associate director of legislative affairs for the American Hospital Association.

He declined to provide the names of the hospitals that received the notices from manufacturers.

“It's a concern,” Rock said. “We will make an assessment to see how this plays out.”

Concern about the possibility of increased supply costs led the AHA and five other groups representing providers and group purchasing organizations to recommend the IRS require manufacturers to certify on their excise tax returns that they did not include the tax in the price of their products.

In comment letters filed earlier this year, they argued that hospitals had agreed to contribute $155 billion, mainly through reductions in Medicare payments, to finance the healthcare law and that manufacturers “should not be permitted to sidestep their ACA financial contribution by passing through the tax to their customers.”

In a Nov. 29 outlook report, Fitch Ratings analysts predicted that device companies will “probably be able to pass through some portion of the tax to customers” even as they absorb the full impact of the excise tax in their operations.

Megan Neuburger, a Fitch analyst, said manufacturers are under increased pressure to lower costs on older medical and surgical supplies for their customers, and devicemakers are now expected to demonstrate that new products have not just a clinical benefit, but also an economic one.

New products, or updated versions of older products, will be more likely to have higher prices as a result of the excise tax, she said.

“I think that will be the big pricing battle over the next few years,” said Kristian Werling, a lawyer with McDermott Will & Emery who works with device manufacturers.

Werling added that most medical and surgical supplies are secured by long-term contracts, which would make it difficult for manufacturers to increase prices and then retain the contracts during future bidding processes. “It's not that easy,” he said.

The device industry is continuing its campaign to repeal the tax.

AdvaMed, the Medical Device Manufacturers Association and the Medical Imaging and Technology Alliance urged repeal in statements released after the IRS issued final regulations on the tax.

“MDMA remains committed to working with elected officials to fix a policy that was a bad idea when it passed, and is proving to be more harmful than imagined to our economy and patient care as it gets closer to implementation,” MDMA President and CEO Mark Leahey said last week in a statement.

MITA has also called for legislation that would delay implementation of the tax.

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