Orthopedic Device Supplier Seeks Exemption From New Excise Tax for Durable Medical Equipment

Dear Assistant Secretary Mundaca, Commissioner Shulman and Chief Counsel Wilkins:

DJO Global (DJO) is pleased to submit comments on the implementation of the new excise tax on medical devices imposed by section 4191 of the Internal Revenue Code (Code). Section 4191 was added by section 1405 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029, 1064-1065 (the Act), in conjunction with the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119. The statutory language imposes an excise tax on the sale of any "taxable medical device" by the manufacturer, producer, or importer of the device in an amount equal to 2.3 percent of the sale price, beginning in 2013. The provision provides exemptions for eyeglasses, contact lenses, hearing aids, 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."

DJO believes that it was not the intent of Congress to subject DMEPOS items to the medical device tax. In an attempt to "bust" the "myth" that the excise tax on medical devices was a "burdensome wheelchair tax," then-Speaker Nancy Pelosi stated that the excise tax on medical devices was not intended to apply to sales of devices to individuals:

Specifically, we urge the Secretary to exempt from the excise tax items classified by the Medicare program as "durable medical equipment, prosthetics, orthotics, and supplies" or DMEPOS, because these items are by definition capable of use by individuals in the home and, therefore, can be said to be "generally purchased by the general public at retail for individual use." For DJO, the exemption of medical devices classified as DMEPOS would result in the exemption of our orthopedic goods classified as orthotics -- such as rigid knee braces, rigid back braces and walking boots, as well as products that are classified as DME, such as bone growth stimulators and electrotherapy devices. We also believe that our products which are considered non-covered items by Medicare should be exempt as these products are also generally purchased by the public. Such non-covered products include, for example, non-rigid braces, as well as cold therapy. The exemption of DMEPOS items would not result in the exemption of our surgical reconstructive implant products, which we do not consider to be generally purchased by the public.

The Secretary's implementation of the excise tax must be sufficiently flexible to accommodate changes to medical products and distribution channels so that future modifications and supplements to the final policy are unnecessary. To accomplish this goal, the exception should broadly exclude medical devices that are purchased primarily for individual use, regardless of whether a prescription is required to obtain the products or whether the individual obtains the medical device through a local pharmacy, the internet or through his or her health care provider. In this regard, the Secretary should focus on whether a particular category of medical devices is more often than not used by individuals.

We are accredited by the Accreditation Commission for Health Care and enrolled in the Medicare program. As a supplier of prosthetic and orthotic devices and related pain therapy and rehabilitation products, the Medicare program considers DJO to be a supplier of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). We distribute our products, including those classified as DMEPOS, through various distribution channels. In some instances, our orthotic products are consigned to health care providers who fit the equipment to individual patients. In other instances, we sell products directly to the patient, such as soft and elastic supports that do not require a prescription. We also sell our products to health care providers, such as hospital systems and pharmaceutical suppliers, which routinely provide medical devices and supplies to their patients and customers for use at home.

(I) Medicare Program's Definition of DMEPOS

"Durable medical equipment" and "prosthetics and orthotics" are, by definition, used in the home. The Social Security Act provides the following definition:

(2) Generally Purchased at Retail for Individual Use

The Secretary should broadly interpret the phrase "purchased at retail" used to describe the exception in Section 4191. DJO firmly believes that it is not practical for the IRS to narrowly distinguish retail sales by the volume of such sales to different end users or through various distribution channels. Such an approach would require repeated determinations of the relative sales of each device. This data is unlikely to be available to individual manufacturers. Even if such data were available, it generally will not be available at the time the excise tax attaches to a manufacturer's sales because of time lags in the distribution chain. Moreover, the sales made through different distribution channels are subject to change over time depending on the dynamics and characteristics of the provision of health care services. Rather than focusing on the various distribution channels, the exception should be tied to whether the public generally or routinely purchases a particular category of medical devices for individual use.

Equally important, the statute does not suggest that relative sales volumes to different types of purchasers was intended to be the key determinant of the types of devices generally purchased at retail for individual use. The Joint Committee on Taxation (JCT) explanation identities those that are typically thought of as such devices, but does not state that tracing of devices to their ultimate end purchaser was contemplated by Congress as the mechanism for determining exempt devices. The retail device marketplace includes many devices other than those identified in the JCT explanation, and the devices identified in the JCT explanation are also sold to health care providers. The statute and legislative history do not suggest that a device that is sold both at retail and to health care providers is only exempt if sold at retail or, alternatively, only if a specific dollar volume is sold at retail. The legislative history suggests, rather, that devices that are designed and intended for sale at retail, even if also sold to health care providers, are exempt regardless of the actual end purchaser.

Further, from an administrative standpoint, the IRS does not have the manpower or personnel to collect and continually update device sales volumes through different channels in a diverse and innovative marketplace, and manufacturers likewise do not have the data or resources to do so for every device they sell in commerce. Accordingly, the excise tax should be implemented in a manner that accommodates rapid changes to medical devices, the short product life cycles, and the multiple distribution channels used to get the product to the individual user.

We strongly recommend that the Secretary exempt from the excise tax those items classified by the Medicare program as "durable medical equipment, prosthetics, orthotics, and supplies" or DMEPOS. Items meeting this definition are used primarily by individuals in the home and, therefore, can be said to be "generally purchased by the general public at retail for individual use." Moreover, we recommend that DMEPOS be identified as exempt from the excise tax regardless of whether some DMEPOS products are distributed through health care providers in order to get these medical devices to the individual user.

We appreciate the opportunity to comment on this issue, and we would be pleased to provide additional information or to answer any questions.

²http://www.msnbc.msn.com/id/32974002/ns/politics-health_care_reform/

³ 42 U.S.C. 1395x; Social Security Act § 1861(n) (emphasis added).