Medical Products Company Seeks Excise Tax Exemption for Diabetes-Related Devices

Implementing the New Excise Tax on Medical Devices Under Section 4191 of the Internal Revenue Code of 1986

Dear Commissioner Shulman:

Bayer HealthCare appreciates the opportunity to submit comments on the new excise tax on manufacturers, producers, or importers of medical devices under section 4191 of the Internal Revenue Code of 1986 (IRC) (added by section 1405 of the Health Care and Education Reconciliation Act of 2010¹). More than 40 years ago, Bayer invented the "glucometer" to help patients with diabetes gain better control over their disease. Bayer remains committed to helping patients manage their diabetes and continues to innovate in the development of diabetes-related devices intended for use directly by patients on an outpatient basis. Bayer's diabetes-related products include medical devices generally available at retail such as blood glucose monitoring systems (including meters, test strips, lancets, lancing devices, and control solution), and A1C at home testing devices.

IRC section 4191(b) expressly exempts from the tax three types of devices -- eyeglasses, contact lenses, and hearing aids. In addition, the section broadly provides an exemption for "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." There is no limit to this exemption based on any requirement for a prescription² or any particular classification under the Federal Food, Drug, and Cosmetic Act (FDCA).³

As noted above, the broad exemption is available for "any other medical device" determined "to be of a type which is generally purchased by the general public at retail for individual use." In other words, the exemption applies whenever a consumer purchases a medical device for his or her own use or that of another person and the purchase is made at a retail store (pharmacy or otherwise), or the retail purchase order is made by mail or telephonic or electronic means and the consumer receives home delivery.⁴ The exemption appears, quite clearly, to have been designed to eliminate the excise tax where the application of that tax to consumer devices would otherwise have led to an increase in retail prices for consumers.

Bayer believes that all of the following diabetes-related devices⁵ are clearly exempt from the excise tax under section 4191 whenever they are intended to be purchased at retail for individual use:

• Blood Glucose Monitoring System -- A blood glucose monitoring system generally refers to a glucose meter, test strips, lancets, and a control solution.

• • Meter -- Patients with diabetes use a glucose meter (monitor) daily, in their homes, at work, and elsewhere, to measure blood glucose quantitatively by placing a blood sample on a test strip (see test strip description below) that is inserted into the meter.⁶

  • Lancing Device & Lancets -- Patients with diabetes use the lancing device and the lancets daily to draw a small blood sample. The sample is placed on a test strip that is inserted into a glucose meter. Typically, the blood sample is drawn from a finger, but alternate sites, such as the palm or forearm, can also be used.

  • Control Solution -- Control solution, included with the monitoring system, ensures that the monitor is functioning correctly. The patient performs a quality control test periodically to confirm that the system is working properly or to confirm that he or she is performing the test correctly. In order to perform the quality control test, control solution is provided as part of the monitoring system.

• Blood Glucose Test Strips -- Patients with diabetes place a droplet of blood onto a reagent strip, at a minimum daily, before inserting it into a blood glucose meter to measure the amount of glucose in their blood. The measurement is used to determine whether the patient's diabetes is in control and whether insulin or other medications should or should not be used to achieve better control in order to reduce the risk of diabetes-related complications.

• A1C Home Testing Device (A1CNow® SELFCHECK) -- Patients with diabetes use this device to test the amount of glycosylated hemoglobin in blood. Glycosylated hemoglobin is a substance in red blood cells that is formed when blood sugar (glucose) attaches to the hemoglobin. The test results are used to measure a patient's blood sugar control over the past several months. The A1CNow® SELFCHECK product also includes a one-time lancet device to draw blood which is placed onto the device to measure the glycosylated hemoglobin.

Bayer's blood glucose monitoring system (meter, test strips, lancets, and control solution) is, per the labeling of the product, indicated for use by persons with diabetes and by healthcare professionals in home settings and in healthcare facilities. This dual use, however, by patients and healthcare providers is not relevant to the issue of whether a device qualifies for an exemption under IRC section 4191(b)(2)(D) where, as here, the products are "generally" sold on a retail basis. The Bayer system and its component devices meet the statutory standard because they all are generally sold on a retail basis, exactly as contemplated by the statute. Despite the fact that the devices are sometimes used in health care facilities, they nevertheless remain "of a type which is generally purchased by the general public at retail for individual use." The plain language of the statute requires that the products be exempt from the tax.

Congress could have chosen -- but did not -- to write the standard to include a reference to "exclusively purchased by the general public". Instead, Congress specifically chose to exempt products whenever they are "generally purchased by the general public" (emphasis added).

Of course, if a device is exclusively indicated for healthcare providers, it does not qualify for an exemption. For instance, Bayer markets the A1CNow+® product only for professional use, and, accordingly, will not seek the exemption for that product.

By contrast, Bayer's A1C home testing device referred to above (A1CNow® SELFCHECK) should be exempt from the device tax, as it is marketed for home use and is sold over-the-counter to the public in retail settings.

Again, Bayer appreciates the opportunity to submit comments on the new excise tax. We look forward to a continued dialogue with the Internal Revenue Service and the Treasury Department on this important public policy and public health issue.

² For instance, contact lenses generally do require prescriptions, but some eyeglasses and hearing aids do not.

³ The device classification system under section 513 of the FDCA classifies devices into three classes (I, II, and III) according to the degree of risk presented by the devices. Class I devices present the least risk and class III devices present the highest risk. The group of devices expressly exempted by IRC section 4191(b) includes products in each of the three classes. See 21 CFR §§ 874.3300, 886.5844, 886.5916, 886.5925. In addition, the congressional Joint Committee on Taxation, in a technical explanation of the Health Care and Education Reconciliation Act of 2010, explicitly stated that the exemption "is not limited by device class as defined in section 513 of the Federal Food, Drug, and Cosmetic Act." JCX-18-10, page 138, available at http://www.jct.gov/publications.html?func=fileinfo&id=3673.

⁴See Joint Committee on Taxation, supra note 3, at 138.

⁵ References to "diabetes" are to diabetes mellitus.

⁶ The meters are not intended for the diagnosis of, or screening for, diabetes.