Health Reform Taxes: Senate Reduces Device Fee, Adds Cosmetic Surgery Tax

Full article reprinted from "The Gray Sheet" - November 23, 2009

Consensus on Capitol Hill is centering on a total tax to the device industry of $20 billion over 10 years to help cover health care reform spending, but the structure of the tax and how it will be allocated remain up in the air. Read more...

Health Reform Taxes: Senate Reduces Device Fee, Adds Cosmetic Surgery Tax

Full article reprinted from "The Gray Sheet" - November 23, 2009

Consensus on Capitol Hill is centering on a total tax to the device industry of $20 billion over 10 years to help cover health care reform spending, but the structure of the tax and how it will be allocated remain up in the air.

The Senate released its eagerly awaited, consolidated health care reform package Nov. 18.

In addition to a fee targeting the device industry as a whole that is lower than previously proposed, the Senate bill includes a new tax that could further add to the burden of some device makers: a 5% per-procedure levy on elective cosmetic procedures.

Senate Halves Device Tax Provision

The consolidated Senate bill, for which Democrats plan to bring up the first procedural vote this weekend, includes a $2 billion-per-year, 10-year annual fee on device manufacturers and importers.

This is half the amount that was approved last month by the Senate Finance Committee, whose $40 billion fee (over 10 years) attracted the ire of Democratic lawmakers from states with high concentrations of device manufacturers.

The $20 billion amount is equal to the total that would be collected under legislation passed by the House Nov. 7, and is at a level that at least a segment of the device industry says they can support.

But the details of the tax structure differ between the new Senate bill and the House bill, and companies say they are concerned about aspects of both (The Gray Sheet' Nov. 2, 2009).

Other than the reduction in the total amount, the main device tax in the new Senate bill is mostly unchanged from the Finance Committee provision.

As before, the non-tax-deductible fee would be assessed annually on companies based on the ratio of a firm's prior-year qualifying device revenues to the total industry qualifying device revenues. Sales of all Class I devices and of Class II devices that sell at retail for $100 or less would be exempt; annual revenues below $5 million would not count towards the total, and revenues between $5 million and $25 million would count at half their value. Collection would begin in 2010.

Other than the total fee amount, the only notable change from the Finance Committee version is the inclusion of penalties for companies that do not report relevant prior-year revenues to the Treasury Department by the annual deadline. The fine would be $10,000 plus the lesser of $1,000 per day late or an extra payment of the ultimately calculated fee.

AdvaMed, which lined up behind the $20 billion figure after railing against the $40 billion proposal, is still looking for changes. In particular, the industry group prefers the House's plan to delay assessment of the first fee until 2013 and to make the payments tax-deductible.

The association is also advocating, albeit with some internal disagreement, for provisions that would reduce the impact of the tax on firms with smaller profit margins - in particular, excluding companies with less than $100 million in annual revenues and more comprehensively scaling the tax rate based on FDA Class I, Class II and Class III device sales (The Gray Sheet' Nov. 16, 2009).

The venture capital community in particular has pressed the need to protect lower-profit start-ups.

The Senate bill's allowances for sub-$25-million revenues "benefits only a small number of device companies and does nothing to adjust for profitability," explains Michael Weinstein, an analyst with J.P. Morgan. "As a result, lower-margin companies or early-stage companies climbing the profitability curve are disproportionately punished, in our view."

If the Senate bill is passed in its current form, the two chambers will still need to work out how to fundamentally structure the tax collection process. Unlike the Senate approach with an annual fee based on prior-year revenues, the House would levy a flat 2.5% tax to manufacturers or distributors at the point of sale for each product (excluding devices sold at retail outlets).

Lobbyists point out that it is more difficult to insert exclusions for low-revenue or low-profit firms under the House structure. Also, the possibility that more than $20 billion will be collected theoretically exists in the House bill, if total device industry revenues are greater than projected.

"We look forward to continued constructive work with members of both houses and the Obama Administration to craft a final proposal that meets the important tests of transparency, predictability, simplicity in administration and fundamental fairness," said Bill Hawkins, CEO of Medtronic.

Industry Worries Cosmetic Tax Could Be Expansive

The newly surfaced cosmetic procedure tax, meanwhile, came as more of a surprise, but at least one aesthetic device maker immediately came out against it.

Starting next year, the legislation would tax patients 5% of the amount paid for any qualifying cosmetic surgery performed by a licensed medical professional where the surgery "is not necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease."

At minimum, procedures such as wrinkle treatment with dermal fillers and some breast augmentations would be among those impacted, but manufacturers worry the reach could be broader.

"We believe the tax is inappropriate and sets a dangerous precedent to use tax policy to make judgments about which medical procedures are necessary and which are considered 'cosmetic,'" said Caroline Van Hove, spokeswoman for aesthetic device maker Allergan. "Numerous elective procedures, including bariatric, LASIK and orthopedic procedures, that may benefit patients cosmetically can also have significant health benefits but could well be targeted by this so-called 'vanity tax.'"

Allergan worries the decision over what is considered cosmetic will be left up to tax auditors, not physicians.

Van Hove calls the tax proposal "ill-conceived" and says that it would discriminate against women, since they receive a large majority of such procedures. "It is a random hit on an easy target that is only punitive and not corrective," she said.

Johnson & Johnson, whose Ethicon business unit sells aesthetic devices, declined to comment.

The tax would be collected from the patient by the surgeon and then remitted on a quarterly basis to the Internal Revenue Service. If the patient does not pay it, the surgeon would be liable for it, the bill states.

- David Filmore

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