Get Ready for the Next Device Tax Fix

The federal tax on medical device sales is set to return in less than two years, making now the time to learn more about how this issue could affect your dental clients.

Dentists concerned that their young patients covered by the Children’s Health Insurance Program (CHIP) might lose coverage of dental care were not the only ones relieved whentaxCongress passed its January stop-gap spending measure. Along with avoiding a government shutdown and funding CHIP for the next six years, the continuing resolution delayed the 2.3% excise tax on the sales of medical devices for two years. According to the Dental Trade Alliance (DTA) and the American Dental Association (ADA), this is good for more than just device manufacturers and importers1,2 in that it helps ensure dentists will continue to have innovative new products and patients will be able to access quality care. However, supporters of the tax like the Washington, D.C.-based Center on Budget and Policy Priorities, say concerns that the tax would impact innovation and care access are overblown and it is fair for manufacturers to pay more in taxes as expansion of government-funded health coverage has created more customers for them.3

Dental sales professionals may wonder where the truth lies and if they should be concerned. After all, any government proposal that could increase the cost of products marketed to dental practices is likely to impact sales. Although Congress is not expected to address the medical device issue again until late 2019, this year’s midterm elections will determine who will be in office when the issue is discussed. Now is therefore a good time to become more knowledgeable about the Medical Device Tax.

Device Tax’s Impact on Dentistry

Had the tax gone into effect on January 1, 2018, as scheduled, it could have increased the annual cost of dental care in the United States by more than $160 million, notes ADA President Joseph P. Crowley, DDS, and ADA Executive Director Kathleen T. O’Loughlin, DMD, MPH, in a January 18 letter to Congress.4 Cost is already a major barrier to good dental health, which means that any increase in cost, even when spread over a large population, should be considered carefully.

The other problem with the tax, according to the ADA, DTA and policy institutes like the not-for-profit Tax Foundation in Washington, D.C.,5 is that it is an excise tax. That means that it is a tax on the sales of products and not on a company’s profits. Medical device manufacturers typically need to make a considerable financial investment to bring a new or improved product to market as the burden to prove the product is safe and effective is high. Because of this, it can take a long time before the investment in research and development begins to pay off and the product becomes profitable. However, because excise taxes are on sales of the product and not on profits, they must be paid right away. A company can’t delay paying them until the product actually begins to turn a profit, and, indeed, if the product is very successful right out of the gate, the tax bill is actually bigger because the more you sell, the more you pay.

One option companies have, of course, is to simply raise their prices 2.3% to cover the cost of the tax, but that’s not so easily done in a competitive market like dental product sales that also has the restriction of fixed reimbursement rates from dental insurers.

“The assumption that it’s a simple matter to pass the tax expense off on to the dental patient is not correct,‘‘ says Gary Price, president and CEO of the DTA. “While some manufacturers might raise prices to cover the cost of the tax, that’s not always possible in a competitive market. It is not clear that if dentists pay more they automatically charge their dental patients more for their services. Finally, assuming no harm because the tax is passed onto patients is naïve. Increased prices for dental services could discourage patients from getting care. That causes everyone harm.‘‘

If companies can’t pass along the cost of the tax, the other choice they have is to cut back on research and development, expansion, or hiring. Indeed, that is what many device manufacturers say they will do if the tax does go into effect in 2020. Last year, the Medical Device Manufacturer’s Association (MDMA) surveyed 117 senior executives at medical device companies about what they would do if the device tax went into effect. Among the executives, 83% said they would decrease spending on research and development, 88% said they would slow down hiring or cut positions, and 77% said they would slow or stop their company’s expansion plans.

The MDMA did not specifically ask whether companies would cut back on product marketing and sales teams, but presumably, that would be something they would consider if they would slow or stop expansion plans and hiring.


How to Contact Your Congressional Representatives

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All politics are local and successful members of Congress (as well as aspiring congressional candidates) are always concerned with how any government policy will impact people in their home districts. Sales professionals are the conduit between manufacturers and dentists. As such, they can see the impact on both the companies that sell dental devices and the dentists who buy and use them. For this reason, sales professionals can help congressional representatives and candidates understand what the tax would do to people in their community because they have a unique perspective on the issue.

However, calling up your elected officials can be intimidating, and simply figuring out whom to call and what to say can be confusing. Here are resources to help get you started:

  1. Figure out what you want to say. The American Dental Association (ADA) and the Dental Trade Alliance (DTA) both have online talking points about the Medical Device Tax that you can review and use to formulate your own brief position statement.
  2. Find ADA information here: ada.org/en/advocacy/advocacy-issues/tax-reform.
  3. Find DTA information here: dentaltradealliance.org/advocacy/legislative-issues.
  4. Locate your members of Congress. The U.S. Congress has two chambers — the House and the Senate — and every U.S. citizen has one representative in the House and two senators in the Senate. To find them, enter your zip code at: govtrack.us/congress/members.
  5. When calling or emailing your legislators, be ready to provide your name and contact information. U.S. senators and representatives get many calls from people who are not able to vote for them because they live outside their states or districts. For your message to get the highest consideration, give contact information proving you are from their district.
  6. Keep tabs on what your legislators do next. At govtrack.us, you can sign up to get email alerts about specific bills or the activity of your members of Congress. Follow up with your Legislators on the issue periodically.

The Money Problem

A two-year delay on the tax is helpful, but what the medical device industry, including dental device manufacturers, really wanted was a permanent repeal of the device tax. Together with various provider associations, like the ADA, they have lobbied hard against the tax since it was first enacted and amassed significant bipartisan support in a historically divided Congress. Legislators as ideologically far apart as Senators Elizabeth Warren (D-Mass.) and Tom Cotton (R-Ark.) both agree on repealing the device tax. In the House, where a permanent device tax bill actually passed in 2015 before getting stalled in the Senate, 234 Republicans and 46 Democrats voted for it.

The reason the decision on whether to permanently repeal the tax was not put forward and a two-year delay was passed instead hinges on money. In Congress, bills expected to raise the federal deficit generally need to include a proposal to generate an equal amount of saving through cuts in spending somewhere else. This is called an offset or a “pay for,‘‘ and offsets are very hard to find as no one wants their particular program or benefit cut to pay for something else.

“Policy changes that involve money are always difficult to accomplish because congressional rules require offsets for any change in revenue,‘‘ Price explains. “Even if the members of Congress have decided the tax is a bad idea, there still has to be an offset for the lost revenue if the tax is repealed. One major reason for the suspension instead of repeal is the fact that suspension requires a smaller offset.‘‘

Finding an offset for a permanent repeal of the Medical Device Tax would require some difficult choices about other health care programs, such as CHIP, community health center funding and the Affordable Care Act’s (ACA) Medicaid expansions. The non-partisan Congressional Budget Office (CBO) calculates the expected costs and savings of changes in legislation and essentially puts a price tag, or a score, on each bill that lawmakers must consider before they vote for or against it. Delaying a tax for just two years produces a much lower score than permanently repealing the bill. In 2015, the CBO scored the stand-alone bill to permanently repeal the device tax that passed the House as costing about $24.4 billion over 10 years. In contrast, the most recent two-year delay was scored at just $3.7 billion, and because it was part of a continuing resolution decision to raise the government debt ceiling, it did not need the normal offset to make it budget neutral.

The ADA is not giving up hope, however, and is supportive of two bills introduced in 2017 that would permanently repeal the tax. Mike Graham, senior vice president of Government and Public Affairs at the ADA, says that the association was pleased with the two-year delay and hopes that lawmakers address the issue before the tax is set to be reinstated in 2020. He notes, “We also support the permanent repeal of this burdensome excise tax and believe both bills (S. 108 and H.R. 184) would decrease operating costs impacting both dental practices and patients.‘‘


Lexicon

CBO score: Estimate by actuaries at the non-partisan Congressional Budget Office on how much a legislative change would either cost or save the government.
Excise tax: A tax on the sales of a product or service.
Legislative vehicle: A bill passing through Congress that has a good chance of passing and can be amended to include an issue that would be unlikely to get voted on by itself. Backers of proposals that may not get voted on by themselves typically seek to have their desired legislative changes written into a more important bill as a “vehicle” for passage.
Pay-for/offset: A proposal to cut government spending in one area that is added to a bill that would increase government spending in another area in order to make the whole bill budget neutral.
Stand-alone bill: A bill in Congress that is on a single issue.


Finding the Right Ride

From a business perspective, it may seem odd to tie together such separate issues as keeping the government funded, continuing CHIP and delaying the Medical Device Tax, but in addition to money, the other important criteria for getting a law passed is having the right “vehicle.‘‘ When there is an important issue that Congress needs to address, but the issue only impacts one group or sector in the economy, the issue has to be tied to something with broad impact — in the case of the most recent Medical Device Tax delay, the threat of a government shutdown.

Tucking an important but seemingly unrelated proposal into a larger bill that must pass helps gain the support of advocates for that issue while giving cover to those opposed to it. Essentially, the opponents can say, “I was not wild about delaying the device tax, but we had to keep the government funded.‘‘

According to Price, there was not a special reason the suspension of the Medical Device Tax was included in the government continuing resolution other than that it was the convenient vehicle at the time. Now attention will need to turn toward preparing for fall of 2019 when the issue will come up again as the two-year extension will run out on December 31, 2019.

“I don’t expect any action on repeal or further suspension until fall 2019,‘‘ Price says. “As is usually the case, I would expect the Medical Device Tax to be included in more broad-reaching piece of legislation rather than individual bills.‘‘

Finding that right vehicle is not easy. A device tax repeal had been proposed as part of the 2017 effort to repeal and replace the ACA, but that legislation failed to pass last September. MDMA also advocated for the device tax repeal’s inclusion in the Republican tax reforms that passed on December 22. However, it was left out of that legislation even as other excise taxes, were removed.

“If one of tax reforms central goals is to spur job creation and growth in the manufacturing sector, then ultimately it must include a full repeal of the Medical Device Tax,‘‘ said Mark Leahey, MBA, JD, BA, president and CEO of the MDMA, at the time.

How Did We Get Here?

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Considering the issues the device tax have caused and how many companies and organizations have come together to oppose it, it is reasonable to ask how the tax ever came into being in the first place. Originally, the Medical Device Tax was proposed as a way to help pay for the expansion of health care coverage in the ACA of 2010. It was signed into law by President Obama as a provision in the ACA and was originally scheduled to take effect on January 1, 2013. However, after two years of companies paying the tax, Congress passed the Consolidated Appropriations Act of 2016, which was signed into law on December 18, 2015. It suspended the tax temporarily from January 1, 2016, to January 1, 2018. The next two-year moratorium on the tax did not actually get signed into law until January 22, 2018, but legislators made the moratorium retroactive so that companies would not have to pay the tax on devices sold in just the first 22 days of this year.

Advocates for the tax argue that the tax was fair because with the expansion of health care coverage, more people would seek treatment for their health care conditions and this would create a much larger market for medical devices and more than offset the industry’s losses from the application of the tax. However, the DTA disputes this. Dental benefit expansion was a minuscule part of the ACA, affecting only children and excluding orthodontia. Its estimate is that the tax costs dental product manufacturers and importers 40 times more than any benefit derived from the expansion of health care coverage.

“To an average person, a tax of 2.3% may not sound significant, but because the tax is applied to sales instead of profits, the application of the excise tax is equivalent to almost doubling the corporate income tax rate,‘‘ Price says.

What You Can Do

Depending on what happens in this year’s midterm elections, Congress could become more active on large national issues. In such a climate, tax issues that impact only one particular industry can easily be forgotten unless legislators hear regularly from their constituents about it. Knowing whether your member of Congress supports or opposes the 2.3% tax on medical device sales is important. The easiest and quickest way to find out is to simply call or email your legislators. (See sidebar, page 14.)

“Everyone in the dental industry and dental providers should contact their members of Congress to ask them to support the repeal of the Medical Device Tax,‘‘ Price says. “These people serve you and also want your vote, so if our collective voice is strong, they will listen.‘‘

BONUS WEB CONTENT

References

  1. American Dental Association. Tax Reform. Available at: ada.org/en/advocacy/advocacy-issues/tax-reform. Accessed March 6, 2018.
  2. Dental Trade Alliance. Advocacy in Washington. Available at: dentaltradealliance.org/advocacy/legislative-issues. Accessed March 6, 2018.
  3. Van de Water P. Excise Tax on Medical Devices Should Not Be Repealed. Feb. 23, 2015. Center on Budget and Policy Priorities. Washington, D.C. Available at: cbpp.org/sites/default/files/atoms/files/2-14-12health.pdf. Accessed March 6, 2018.
  4. Crowley JP, O’Loughlin KT. To Mitch McConnell, Paul Ryan, Chuck Schumer and Nancy Pelosi. Available at: ada.org/en/publications/ada-news/2018-archive/january/ada-asks-congress-to-prioritize-chip-repeal-medical-device-tax. Accessed March 6, 2018.
  5. Pomerleau K. The ACA Medical Device Tax: Bad Policy in Need of Repeal. Available at: taxfoundation.org/aca-medical-device-tax-bad-policy-need-repeal/. Accessed March 6, 2018.

Featured Image by MOKEE81/ISTOCK/GETTY IMAGES PLUS; RIHARDZZ/ISTOCK/GETTY IMAGES PLUS

From MENTOR. April 2018;9(4): 12-16.

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