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IRS Issues Final Rule on Medical Device Tax

The Internal Revenue Service (IRS) has issued its final rule on the medical device tax. The Patient Protection and Affordable Care Act of 2012 (PPACA or “Obamacare”) included a provision that imposes a 2.3% excise tax on the sale of certain medical devices. There has been a lot of concern about the applicability of the tax to devices that are dispensed by pedorthists. This article described the circuitous route that essentially exempts pedorthic devices from the tax during this phase of the regulatory process.

By way of background, in February of this year, the IRS published a Notice of Proposed Rulemaking (RIN 1545-BJ44) relative to the applicability and implementation of the medical device excise tax. The excise tax primarily impacts manufacturers, importers and producers of taxable medical devices.

Generally, a “taxable medical device” is defined as an “…instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part or accessory, that is recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them; intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease; or intended to affect the structure or any function of the body, and that does not achieve its primary intended purpose through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary purposes.”

In general, taxable medical devices do not include eyeglasses, contact lenses, hearing aids, and any other device that is generally purchased by the general public at retail for individual use (the “retail exemption” of the regulation).

A device will be considered covered under the retail exemption as being of a type generally purchased by the public at retail for individual use if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional. The fact that a device requires a prescription is not a factor in the determination of whether or not the device falls under the retail exemption.

Factors relevant to determining if a device falls under the retail exemption include:

1. Consumers who are not medical professionals can purchase the device through retail businesses that also sell items other than medical devices, such as drug stores, supermarkets, and similar vendors;

2. Consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional;

3. The device is classified by the U.S. Food and Drug Administration (FDA) under Physical Medical Devices.

Factors relevant to determining if a device does not fall under the retail exemption include:

1. The device generally must be implanted, inserted, operated, or otherwise administered by a medical professional;

2. The cost to acquire, maintain and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer;

3. The device is a Class III device under the FDA system of classification;

4. The device is classified by the FDA under certain categories such as Clinical Chemistry and Clinical Toxicology Devices; Immunology and Microbiology Devices; Cardiovascular Devices; Ophthalmic Devices; Orthopedic Devices; Radiology Devices, etc.

5. The devices qualifies as DMEPOS, and supplies for which payment is available exclusively on a rental basis under Medicare Part B payment rules, and is an “item requiring frequent and substantial servicing”.

PPACA “safe harbor” provisions consider certain devices to be of a type generally purchased by the general public at retail for individual use to include – specific to pedorthics – “…and Subpart D of 42 CFR 414 [Durable Medical Equipment and Prosthetic and Orthotic Devices], for which payment is available on a purchase basis under Medical Part B payment rules, and are: [1] ‘Prosthetic and orthotic devices,’ as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional;…[3] “Customized items” as described in 42 CFR 414.224; [4] “Therapeutic shoes,” as described in 42 CFR 414.228(c); or [5] Supplies necessary or the effective use of DME, as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual (Centers for Medicare and Medicaid Studies Publication 100-02).”

The bottom line is that, as in the initial Notice of Proposed Rulemaking in February, the final rule on the medical device excise tax does not impact the modalities provided by pedorthists to their patients or the suppliers to their pedorthic customers.