Trade Group Seeks Excise Tax Exemption for Orthotics, Prosthetics

Internal Revenue Service

On behalf of the American Orthotic and Prosthetic Association (AOPA) I am pleased to provide comments concerning the medical device excise tax (the "device tax") enacted as new Internal Revenue Code (the "Code") section 4191 under section 1405 of the Health Care and Education Reconciliation Act of 2010 (HCERA), which amended the Patient Protection and Affordable Care Act (PPACA) (collectively, ACA). We appreciate the efforts being made by the IRS and Treasury to obtain information from the industry in advance of developing guidance on the device tax. In developing final rules, clarity with respect to the application of the tax in various contexts will be essential for the affected industries to properly implement the tax.

AOPA believes that orthotic and prosthetic devices qualify for the exception to the device tax for devices generally sold to the generally public at retail. Orthotic and prosthetic devices are:

• Generally sold to the general public. Custom orthotic and prosthetic devices are prescribed by a physician to treat a particular condition and delivered directly to patients similar to the way hearing aids and eyeglasses are delivered directly to those who need them. Off the shelf orthotics are sold directly to patients through retail outlets including patient care facilities and drug stores.

• Generally sold at retail: Orthotic and prosthetic devices are delivered through patient care facilities which are classified by the Food and Drug Administration as retail outlets.

• For individual use. Orthotics and prosthetics are clearly designed and sold for use by individuals in their daily lives. In the significant majority of cases, the device is individualized for use by a particular individual.

These issues are discussed in detail below.

AOPA works on behalf of patient care facilities that provide orthotic and/or prosthetic (O&P) care directly to patients, suppliers that produce or sell the materials, components, tools and equipment used in fabricating orthoses or prostheses, and educational and research institutions that provide formal education in orthotics and prosthetics. Founded in 1917 and now with nearly 2,000 members, AOPA is the largest nonprofit organization dedicated to helping orthotics and prosthetics businesses and professionals navigate the legislative and regulatory issues impacting the delivery of quality orthotics and prosthetics care.

What are Orthotics and Prosthetics?

In general, orthotics and prosthetics are external medical devices used to improve or maintain the function of a part of an individual's body in accordance with a physician's prescription. Most orthoses and prostheses are customized to fit a particular individual, although there are "off the shelf" orthotics, which are sold at retail outlets including patient care facilities and drug stores (such as shoe inserts) that are not specialized for a particular person. Orthoses are devices (braces) worn on the arms, legs, neck or trunk to support, correct or prevent deformities of or align body structures for functional improvement. Prostheses are devices and components that are used to replace, in whole or in part, an arm or leg, as well as external breast prostheses incident to mastectomy resulting from breast cancer. Orthotic and prosthetic devices are generally categorized as follows:

• Custom-fabricated prosthetics and custom fabricated orthotics are devices that are made from detailed measurements, images, or models in accordance with a prescription and that can only be utilized by a specific intended patient. These devices are fabricated based on clinically derived and rectified castings, tracings, measurements, or other images (such as x-rays) of the body part. The fabrication may involve using calculations, templates and component parts. This process requires the use of basic materials and involves substantial work such as vacuum forming, cutting, bending, molding, sewing, drilling and finishing prior to fitting on the patient. Custom-fabricated devices should be furnished only by an appropriately credentialed (certified or licensed) practitioner or accredited supplier in orthotics or prosthetics. As discussed in more detail below, this final process generally takes place through what is called a "patient care facility", which is a retail establishment. For Medicare purposes, such devices and related services are represented by the set of L-codes under the Healthcare Common Procedure Coding System (HCPCS). [These are classified by FDA as class I devices (lowest risk).

• Custom-fitted high orthotics are orthotic devices that are initially made with no specific patient in mind, but are then appropriately sized, adapted, modified, and configured (with the required tools and equipment) to fit a specific patient and meet his or her unique needs, in accordance with a prescription. After the device is modified for the specific patient the device is suitable only for that specific individual. Custom fitted high devices should be furnished only by an appropriately credentialed (certified or licensed) practitioner or accredited supplier in orthotics or prosthetics. As discussed in more detail below, this final process generally takes place through what is called a "patient care facility", which is a retail establishment. For Medicare purposes, such devices and related services are represented by the set of L codes under the Healthcare Common Procedure Coding System (HCPCS). These also are classified by FDA as class I devices (lowest risk).

• Custom-fitted low orthotics are orthotic devices that are produced with no specific patient in mind, but that are appropriately sized and adjusted to a specific patient in accordance with a prescription. ). These also are classified by FDA as class I devices (lowest risk).

• Off-the-shelf orthotics are prefabricated devices that require minimal self adjustment for appropriate use. These orthotics are typically sold through drug stores and similar establishments. ). These also are classified by FDA as class I devices.

Typical users of orthotic and prosthetic items are individuals who have experienced full or partial limb loss or significant limb impairment. Often, these individuals include children or adults with congenital deformities or chronic conditions, victims of accidents or natural disasters and veterans. While a significant number of amputations are the result of traumatic injury, diabetes and peripheral vascular disease are even more likely to require amputation. More than 80,000 diabetes-related lower limb amputations are performed every year in the United States. Another 30,000 limb amputations annually are the result of peripheral vascular disease. The need for orthotic devices may also arise from an injury, but long-term chronic debilitating conditions such as cerebral palsy, multiple sclerosis, and spina bifida are the causes of many patients' life-long need for orthotic devices.

How Are Orthotic and Prosthetic Items Produced?

With the exception of off-the-shelf orthotics, manufacturers do not assemble or produce "finished" devices. The creation of a complete orthosis or prosthesis begins at the component stage, where a manufacturer produces the component parts or hardware, such as prosthetic knees, feet, or pylons. These component items move down the distribution chain -- sometimes through wholesalers and distributors -- ultimately to the retail patient care facilities. The components then reach the patient care facilities, the consumer-level retail establishments where orthotic and prosthetic practitioners assemble, customize and fit the orthosis or prosthesis to the individual patient. These facilities are typically small businesses with annual revenues of less than $5 million. In more than half of facilities, the annual revenue is $2 million or less.

How Is Orthotic and Prosthetic Care Delivered?

With the exception of off-the-shelf orthotics, prostheses and custom orthoses are prescribed by a physician to treat a particular condition and delivered directly to patients in patient care facilities, similar to the way hearing aids and eyeglasses are delivered to those who need them. Once a patient has been prescribed a prosthesis or an orthosis, he or she selects a patient care facility that can supply, fit or produce the prescribed item. At the patient care facility, a certified/licensed orthotic and/or prosthetic practitioner or health care professional determines the patient's needs based on his or her anatomy and the physician's prescription, orders the appropriate component parts (e.g., the components of a prosthetic leg, or a customizable leg brace), and then assembles the orthosis or prosthesis according to the prescription and the patient's unique conditions and measurements. In most cases, the end product/device is a custom-fabricated or custom-fitted unit, built for a single patient and that patient only, in accordance with a specific prescription written by that patient's physician. In creating a prosthetic device for a patient, the supplier would determine what component parts from a variety of manufacturers would be appropriate given the patient's weight, height and activity level. These parts would be in inventory or available to be ordered.

Are Orthotics and Prosthetics Covered by Insurance?

Orthotic and prosthetic items are typically covered through a combination of the patient's health insurance benefits and out-of-pocket payments. In many cases, patients are forced to pay for these items entirely (or almost entirely) out of pocket because private insurance health benefits are not sufficiently comprehensive or have low annual or lifetime limits on orthotic and prosthetic benefits.¹

Devices may qualify for the retail sale exception even if some sales are not at retail or not to the general public. Devices of any classification (i.e., Class I, Class II or Class III) may be exempted under this exception.

We believe that orthotic and prosthetic devices qualify for the retail sale exception. Further, component parts of devices that are manufactured upstream from the sale should also be exempt from the device tax in order to give full effect to the retail sale exception. Detailed discussion of these issues follows.

Medicare defines orthotics and prosthetics in 1861(s) -- definition of "medical and other health services":

The retail sale exception to the device tax attempts to distinguish sales of medical devices that are generally made to the general public and those that are not. There is no precise definition of "generally" in Section 4191. The exception does not require that all sales of a device be to the general public, nor does it look to each sale in particular, but rather to the usual method of sale of the product. As described in the House version of ACA, the device tax was aimed at devices sold "for use in connection with providing any health care service". That is, the device tax is focused on devices generally sold to hospitals, doctors, and other heath care providers for use in providing medical services, rather than devices that are generally delivered directly to individuals for their personal use.

Orthotics and prosthetics are sold directly to the consumer through patient care facilities that are classified by the Food and Drug Administration (FDA) as retail outlets. The status of such facilities as retail outlets is discussed in further detail below. Orthotics and prosthetics reach the consumer in much the same way as eye glasses and hearing aids, Prostheses and custom orthoses are prescribed by a physician to treat a particular condition, Once a patient has been prescribed a prosthesis or an orthosis, he or she selects a patient care facility that can supply, fit or produce the prescribed item. At the patient care facility, a certified/licensed orthotic and/or prosthetic practitioner or health care professional determines the patient's needs based on his or her anatomy and the physician's prescription, orders the appropriate component parts (e.g., the components of a prosthetic leg, or a customizable leg brace), and then assembles the orthosis or prosthesis according to the prescription and the patient's unique conditions and measurements. In most cases, the end product/device is a custom-fabricated or custom-fitted unit, built for a single patient and that patient only, in accordance with a specific prescription written by that patient's physician.

The orthosis or prosthesis is not used in the course of providing medical care, rather the finished orthosis or prosthesis received by the patient at the retail patient care facility is used by the individual in his or her daily life in his or her home and in his or her daily activities. Orthotics and prostheses often are removable by the individual, who is responsible for their use and care on a daily basis.

Orthotics and Prosthetics are "Generally Purchased . . . at Retail"

Section 4191 does not contain a definition of what is considered a sale "at retail" for purposes of the device tax. Preexisting excise tax provisions in the Code define a retail sale as a sale for a purpose other than resale, after manufacture, production, or importation. See Code § 4002(a). The Technical Explanation of ACA produced by the Joint Committee on Taxation describes the exception as including devices "generally sold at retail establishments (including over the internet) to individuals for their personal use."²

As noted above, orthotics and prostheses are generally sold by patient care facilities which typically modify and fit a particular orthosis or prosthesis for an individual. While registration of device manufacturers is generally required under the FD&C Act, the FDA has found, pursuant to its authority under section 510(g) of the FD&C Act, that registration of certain device establishments "is not necessary for the protection of the public health."³ In particular, "[p]ersons who dispense devices to the ultimate consumer or whose major responsibility is to render a service necessary to provide the consumer (i.e., patient, physician, layman, etc.) with a device or the benefits to be derived from the use of a device; for example, a hearing aid dispenser, optician, clinical laboratory, assembler of diagnostic x-ray systems, and personnel from a hospital, clinic, dental laboratory, orthotic or prosthetic retail facility, whose primary responsibility to the ultimate consumer is to dispense or provide a service through the use of a previously manufactured device" are exempted from the requirement to register with the FDA.⁴

Thus, the FDA does not consider orthotic and prosthetic patient care facilities to be manufacturers, rather, they are considered retail establishments. In this regard, they are treated in the same manner as opticians and hearing aid dispensers, which respectively, supply eyeglasses/contact lenses and hearing aids directly to consumers at retail for their individual use, which devices are excluded from the device tax. The device tax should be implemented in a consistent manner with FDA treatment by treating sales of orthotics and prosthetics as retail sales.

Patient care facilities also have characteristics of retail establishments generally. For example, they often have inventories (in addition to "off the shelf" items). Custom fabricated orthotics and prosthetics are similar to high end items, such as custom furniture, counter tops or clothes that are specifically designed and made for a particular individual and custom fit for a particular space or person. These custom products are clearly sold "at retail". Patient care facilities in this instance are not hospitals, nor clinics. They are subject to Medicare requirements including having a regular street address, and regular posted business hours for which they are open to the general public as a retail establishment. These requirements were established to eliminate fraud and abuse but also serve to describe the traditional elements of retail outlets.

The Veterans Administration (VA) also provides care related to orthotics and prosthetics. It is important to understand the role the VA plays in relation to orthotics and prosthetics. The VA provides significant leadership in research in this field, particularly during war time. Patients may be provided orthotics and prosthetics within the VA system by an orthotist or prosthetist who is a federal employee. Some patient care facilities may have contracts to care for VA patients, as well. Regardless of setting, the process of designing a limb from a variety of component parts in inventory or ordered from the manufacturer or creating an orthosis for individual use is the same . While the VA may be the most visible program in providing artificial limbs and orthotics, it represents less than five percent of total sales in patient care facilities.

Orthotics and Prosthetics are Sold for Individual Use

There should be no doubt that all the types of orthoses and prostheses are designed and sold for use by individuals -- whether it be on a customized basis for a particular individual, prefabricated, made with no particular patient in mind but then shaped or fitted to a patient's unique and specific anatomy, measurements or characteristics, or off-the-shelf. A custom orthosis or prosthesis could not be used by another individual and achieve a quality outcome. If another individual tried to use the modified orthosis, it could lead to harm for that individual.

In this respect, these orthoses and prostheses are like those devices already exempted from the excise tax. In some cases, eye glasses (such as magnifying reading glasses) are sold off the shelf at drug stores and similar establishments, in other cases, eye glasses, contact lenses or hearing aids will be custom fabricated or fitted to precisely fit an individual's unique characteristics. Therefore prosthetics and custom fabricated or fitted orthotics are made for individual use just as eye glasses, contact lenses and hearing aids all of which are explicitly exempted from the excise tax under Code Section 4191(b)(2). They are prescribed by a physician and made or shaped to be specific to an individual.

Component Parts Used in the Final Orthosis or Prosthesis Should be Exempt from the Tax

The FDA has historically required manufacturers of the component parts to register and comply with related regulatory requirements (e.g., supplying a list of devices, filing regular reports). Companies treated as manufacturers of orthotics and prosthetics by FDA do not manufacture a finished medical device, but rather manufacture components selected at the retail O&P patient care establishment for use in building the final custom O&P device. While these component part makers are considered by the FDA to be manufacturers, their products are not sold directly to consumers and instead are consolidated into a final orthosis or prosthesis sold by at the retail level by the patient care facility for individual use. The preexisting excise tax rules in the Code provide an exception, in accordance with regulations, for component parts that are sold for use in further manufacture. Code § 4121(a)(1). Under Treasury regulations, this exception applies to components that are used in the manufacture of a taxable product. Treas. Reg. § 48.4221-2(b).

In order to give full effect to the retail sale exception, component parts should also be exempt from the excise tax. The law makes clear Congressional intent was that devices falling within the retail sales exception should be completely free of any burden from the medical device excise tax. Failure to exempt component parts will defeat the purpose of the exception. Thus, IRS and Treasury should clarify that component parts of devices that are exempt from the tax are also exempt from the tax.

To preserve the intent of the retail sale exemption, the component parts of exempted devices also may not be taxed.

On behalf of the patients and practitioners, AOPA urges you to exempt orthotics and prosthetics (and their component parts) from the medical device excise tax. I would be happy to answer any questions you may have.

² Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the "Reconciliation Act of 2010," as Amended, in Combination with the "Patient Protection and Affordable Care Act" (JCX-18-2010) March 21, 2010, at 138.

³ 21 CFR § 807.65(i).

⁴ 21 C.F.R. § 807.65(i) (emphasis added).