Why HME shouldn't be subject to PPACA's medical device excise tax
Earlier in 2011, industry stakeholders submitted comments to the Internal Revenue Service on the provision in last year's health reform law (the Patient Protection and Affordable Care Act) that will require manufacturers and importers to pay an annual excise tax on the sale of a “taxable medical device” equal to 2.3 percent of the price of the device.
Importantly, the law also requires the Secretary of the Treasury to exempt from the definition of “taxable medical device” any medical device determined to be of a type that is “generally purchased by the general public at retail for individual use.”
The Department of Treasury will issue guidance to implement the new medical device excise tax, which will be effective for sales on or after Jan. 1, 2013. Before issuing its guidance, the IRS has asked the public for comments on the tax, particularly regarding the exemption Congress required for devices “generally purchased by the general public at retail for individual use.”
Following is a summary of Invacare's comments to the IRS, in which the company demonstrates that home medical equipment meets the statutory definition of devices that must be exempted from the excise tax.
- Items of DME are clearly “generally purchased by the general public.”
The intent of Congress throughout the entire health care reform process has been that the tax, or fee, should apply to medical devices such as scalpels, diagnostic equipment and other items used “in connection with providing a health care service,” in the words of the House bill.
Items used in connection with providing a health care service are not generally purchased by the general public; they are purchased by hospitals, medical offices, physician practices and other health care providers. Although it is true that some items of HME will be purchased by health care providers, the phrase “generally purchased” provides the Secretary of the Treasury with enough flexibility to determine that a sale of an item of HME is “generally purchased by the general public,” and thus, meets the first prong of the exemption.
Individuals can purchase HME items at retail establishments such as a local retail pharmacy, a local HME retailer or a big-box retailer such as Walmart. There are a wide variety of firms that sell (and/or rent) HME items. Regardless of the array of HME devices they carry, HME retailers share the common characteristic of selling HME directly to consumers for the consumers' own use.
While individuals always purchase HME items from an HME retailer, similar items may also be purchased in large quantities by a health care institution such as a hospital or nursing home. For purposes of the implementation of this exemption, we believe that HME items are purchased more often by individuals than by institutions.
Also, in many instances (for example, home care beds), the product purchased and used by the consumer in his/her home will be a different product than a similar product purchased and used by patients in a heath care institution (a hospital or nursing home bed, which is distinctly different from a home care bed).
We have conducted research regarding the term “generally purchased” and have found no health care example where the government defined that term. The closest verbiage is found in the Medicare program and its interpretation of the similar term “usually.”
The Medicare program provides limited benefits for outpatient prescription drugs. The program covers drugs that are furnished “incident to” a physician's service provided that the drugs are not “usually” self-administered by the patients who take them. Section 112 of the Benefits, Improvements & Protection Act of 2000 redefined this exclusion to drugs “not usually self-administered by the patient.”
For the purposes of applying this exclusion, the Centers for Medicare and Medicaid Services defined the term “usually” to mean more than 50 percent of the time for all Medicare beneficiaries who use the drug. Therefore, if a drug is self-administered by more than 50 percent of Medicare beneficiaries, the drug is excluded from coverage, and the contractor may not make any Medicare payment for it.
Further, Merriam-Webster's online dictionary identifies the word “generally” as being synonymous with “usually.” We recommend that the IRS employ a definition for the term “generally purchased by the public” consistent with how CMS has defined the term “usually.” Therefore, any medical device that is purchased by an individual at least 50 percent of the time should be exempt from the excise tax.
- Purchased “at retail.”
The second prong of the law's exclusion requires that the item of HME be of a type that is generally purchased “at retail.” Other excise tax provisions already present in the Internal Revenue Code define a sale “at retail” as a “sale, for a purpose other than resale, after manufacture, production, or importation.”
This definition is consistent with the common legal definition of a retail sale as used in most state sales tax laws (sales taxes generally apply to sales “at retail”) and as set forth in Black's Law Dictionary: “[t]he sale of goods or commodities to ultimate consumers, as opposed to the sale for further distribution or processing.”
It seems clear that a sale of even a technologically advanced item of DME, such as a power wheelchair, would qualify as a sale at retail because it is a sale to the end-user, the ultimate consumer. These products are all sold on an individual basis, one wheelchair or other HME item at a time. Further, certain HME items, such as complex power wheelchairs, are actually manufactured to the specifications of the particular consumer to meet his/her specific medical needs. If such items are “generally” sold to the end-user, then sales of such items are eligible for this exemption.
Further, state licensure laws support the notion that HME is generally sold at retail. While not all states require HME firms to be licensed, many do. There are approximately 22 states that require firms that sell home medical items to be licensed in order to sell to consumers in the state. States that require HME firms to be licensed generally require them to operate out of an appropriate physical facility with a business number, with visible posted signs, and in a location that is accessible to the public.
While state licensure requirements vary somewhat, common themes include having an “appropriate” physical location where consumers can shop during normal business hours. Following are relevant excerpts from some state license requirements:
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California's licensure law calls an HME firm a “home medical device retailer” and requires these firms to include “an area, place or premises from which … home medical devices and home medical device services are sold, fitted or dispensed at retail.”
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The South Carolina DME Provider Manual states that the provider must have a physical retail business location in South Carolina or within 25 miles of the state's border.
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Ohio requires HME firms to maintain a facility that is appropriate to lease or sell HME.
Finally, Medicare enrollment requirements for DME suppliers require the firms to operate out of retail locations. In order to qualify for a Medicare DME billing number, a firm must comply with 32 Medicare supplier standards. Among the requirements are that the location (a) maintain a physical location on an appropriate site; (b) be in a location that is accessible to the public; (c) be accessible and staffed; (d) have a permanent visible sign; (e) have posted hours of operation; and (f) be open to the public at least 30 hours per week. These criteria are typical practice patterns of any retail business.
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- “For individual use.”
A medical device meets the exclusion if it is of a type that is generally sold for individual use. It seems obvious that items of DME would satisfy this prong of the exclusion as they are used by individuals. The definition of DME in the Social Security Act supports this common understanding of DME as it references “individuals” and “patients” as users of the equipment multiple times.
All that said, “home medical equipment” meets the statutory definition of devices that shall be excluded from the device excise tax: a “medical device determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use.”
For purposes of an exemption consistent with Congress' intent, we recommend that the IRS adopt the following definition of “home medical equipment:”
Home medical equipment and supplies is a category of medical devices intended by the manufacturer to be regularly used by patients/consumers whose care is being managed in their homes/communities. Specifically, HME and supplies:
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Are “medical devices” as defined by the Food and Drug Administration;
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Are items that are generally designed and purchased by an individual for his/her use in the home and community (rather than used by individuals in a health care institution);
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Are sold by the manufacturer regularly through retail distribution channels focused on sales for home/community use;
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Are primarily and customarily used to serve a medical purpose;
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Are not useful to an individual in the absence of illness, injury, functional impairment or congenital anomaly;
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Are needed to maintain the patient in his/her home and community (not in a health care institution);
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Includes, but is not limited to, respiratory therapy (including home oxygen, sleep therapy technologies, inhalation drug therapy), mobility assistive technologies (including canes, crutches, walkers, manual wheelchairs, scooters and power wheelchairs), diabetes therapy and supplies, home infusion therapy, negative pressure wound therapy, ostomy supplies, wound care dressings and supplies, home and bath safety aids (including shower chairs, bath safety rails, commodes, lifts, slings) and other medical equipment, therapy and supplies that are regularly used in the home and community (not in a health care institution);
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Includes supplies that are used in conjunction with a piece of medical equipment and that must be replaced on a regular basis.
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A specialist in health care legislation, regulations and government relations, Cara C. Bachenheimer is senior vice president, government relations, for Invacare Corp., Elyria, Ohio. Bachenheimer previously worked at the law firm of Epstein, Becker & Green in Washington, D.C., and at the American Association for Homecare and the Health Industry Distributors Association. You can reach her at 440/329-6226 or cbachenheimer@invacare.com.
