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Medical Device Company Seeks Excise Tax Exemption for Ostomy Prosthetic Products

MAR. 18, 2011

Medical Device Company Seeks Excise Tax Exemption for Ostomy Prosthetic Products

DATED MAR. 18, 2011
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March 18, 2010

 

 

Natalie A. Payne

 

Office of Associate Chief Counsel

 

Internal Revenue Service

 

CC:PA:LPD:PR (Notice 2010-89)

 

Room 5203

 

P.O. Box 7604

 

Ben Franklin Station

 

Washington, DC 20044

 

 

Re: Notice 2010-89; Request for Comments Regarding the Excise Tax on Medical Devices

Dear Ms. Payne:

On behalf of ConvaTec, a global medical device company that creates high-quality, innovative products to meet the healthcare needs of ostomy, wound, and diabetes patients and the healthcare professionals who care for them, we welcome the opportunity to provide comments regarding the excise tax for medical devices established under section 4191 of the Health Care and Education Reconciliation Act of 2010 (PL 111-152). ConvaTec respectfully urges the Department of the Treasury to exclude ostomy prosthetic products from the medical device tax.

 

Background on ostomy products

 

 

More than 700,000 Americans -- from children to senior citizens -- have had ostomy surgery, a procedure that creates an artificial opening in the abdomen to the intestines or urinary system to allow for the elimination of bodily wastes, through the use of a prosthetic device to restore bodily function. An ostomy procedure is essential to many patients who have endured traumatic injury to the abdomen or suffer from serious chronic or life threatening illnesses and conditions, including: colorectal cancer; bladder cancer; Crohn's Disease; inflammatory bowel disease, such as ulcerative colitis; birth defects; and other intestinal or urinary medical conditions.

 

Ostomy products are essential to daily life and

 

purchased at retail

 

 

Following ostomy surgery, patients need specially-fitted medical prosthetics products on a daily basis to temporarily, or permanently, restore intestinal or urinary system function -- an essential activity of daily living. An individual with an ostomy cannot leave his or her residence without an ostomy product. Like hearing aids, contact lens, and eyeglasses which restore an essential activity of daily living (e.g., hearing or sight), ostomy products restore an essential daily function to eliminate bodily waste. However, hearing aids, contact lens, and eyeglasses are specifically excluded from the medical device tax in the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).

Ostomy products are purchased for individual use through a variety of retail outlets, including large national drug store and pharmacy chains, on-line and mail-order retail establishments and smaller medical device outlets.

 

Congressional Intent

 

 

Throughout the legislative debate leading to passage of the Patient Protection Affordable Care Act (PPACA), (P.L. 111-148) -- Class I devices, which include ostomy products, along with Class II devices sold to consumers at retail for less than $100, were excluded from the medical device tax.

One week after the PPACA law was in place, Congress passed, and the President signed the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), which included a provision that repealed the medical device provision in PPACA, replacing it with language exempting only eyeglasses, contact lenses, and hearing aids from the medical device tax "and any other medical device determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use."

 

Ostomy Products Meet All the Statutory Definitions to

 

be Exempt from the Device Tax

 

 

Congress granted the Secretary the discretion to exclude medical devices that are "generally purchased by the general public at retail for individual use." This language indicates that the Congress intended to apply the exemption to products, such as ostomy products and other commonly used over-the-counter retail products. We ask that the IRS consider the following issues when deciding on how to apply the exemption as it relates to ostomy prosthetic products.

  • The medical device tax is intended to apply to products purchased and used by health care professionals such as heart valves and artificial hips. Given the examples in P.L. 111-152 specifically exempted from the tax, it is clear that the tax is not intended to apply to products used primarily by the general public.

  • As long as devices are used by individuals (as opposed to health care professionals) and are sold by retail outlets directly to consumers (e.g., medical supply stores, mail-order, and conventional pharmacy stores), those devices should be considered for the tax exemption. As conventionally used, the term "retail" applies more to the end purchaser than to the location of the sale.

  • While the Act does not define the term "at retail," other provisions in the Internal Revenue Code provide some guidance. For example, under the code, "first retail sale" is defined as "the first sale, for a purpose other than for resale or leasing in a long-term lease, after production, manufacture, or importation" (26 U.S.C. § 4052(a)). See also 26 U.S.C. § 4002. Under the federal food and drug code, the term "at retail" means "a sale or purchase for personal use" (21 U.S.C. § 802 (Food & Drug Code)).

  • Significantly, none of the definitions of '"at retail" include any requirements that the sale take place in a retail establishment or location. Thus, if the sale for a device is to the end-user with no further distribution intended, and sale is for personal use, that can constitute a sale "at retail," whether or not the sale occurs within a retail establishment. Thus, mail order transactions, although they do not take place within a retail establishment, can be considered "at retail," given the statutory interpretations referenced above.

Ostomy Products are Like Hearing Aids, Contact Lenses

 

and Eyeglasses

 

 

In addition to ostomy products being used daily by the general public and purchased from general retail sites, there is a direct parallel between ostomy prosthetic devices and eyeglasses and contact lenses, which are also defined by Medicare as prosthetic devices as they replace all, or part, of an internal body organ (as do ostomy products). Given that eyeglasses and contact lens are exempt from the tax, there is a strong argument that ostomy products, as a prosthetic, should also be exempted from the tax. Under Medicare law (42 U.S.C. § 1395x(s)(8)):

 

[P]rosthetic devices (other than dental) which replace all or part of an internal body organ (including colostomy bags and supplies directly related to colostomy care), including replacement of such devices, and including one pair of conventional eyeglasses or contact lenses furnished subsequent to each cataract surgery with insertion of an intraocular lens;"

 

The Medicare Benefit Policy Manual, Chapter 15, section 120 includes a list and a discussion of the products considered prosthetics under the Medicare program. Ostomy products are specifically cited in the manual as prosthetics. The manual is a great resource to clarify just what types of products fall under the prosthetic category, including the specific products that were exempted from the tax by P.L. 111-152.

 

Summary

 

 

ConvaTec appreciates the opportunity to submit comments on this important issue. We realize the IRS is implementing a Congressionally-mandated tax and will likely receive many comments advocating for and against differing levels of inclusion. As mentioned, we believe that ostomy products are a natural exclusion, based on the flexibility within the law and the exclusions that were already outlined within the law. We believe Congress did not intend for daily use, over-the-counter products, such as ostomy prosthetic products, to be included in the tax. We ask that the IRS consider the proposed exemption to be practical and viable for the following reasons:

 

1. Congress has determined that several prosthetics are explicitly exempt from the medical device tax (i.e., hearing aids, contact lenses, and eyeglasses). All three of these devices can be purchased by the general public at retail for individual use.

2. Exempting ostomy prosthetic devices that are available at retail outlets by the general public is within the spirit and scope of the provision Congress included in the law.

 

Thank you again for your consideration of these comments. If we can be of any assistance to you or your colleagues on this important matter, please do not hesitate to contact me at 908-904-2777.
Sincerely,

 

 

Joseph Rolley

 

ConvaTec

 

Skillman, NJ
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