The 2.3% medical device excise tax that takes effect January 1 doesn't have a lot of fans, even among those that are excited about the promise of near-universal health insurance. Unfortunately, I fear that the diagnostic-specific badness of this tax has been left largely unexplored.
Taxes are generally unpopular... however, IRS appears to have made earnest efforts to be clear and even-handed. Unfortunately, the situation may be neither clear or balanaced when it comes to lab tests. The implementing regulations create a situation for clinical labs that is might be an industry-sized loophole or a deathtrap of epic proportions.
Which one? I have no idea how anyone could know. And that's a bit terrifying.
This might be a great moment to point out that I'm not a tax attorney, a tax accountant, or even a sophisticated enough taxpayer to have holdings in the Cayman Islands. I have no idea at all how to advise anyone on taxes, so please don't take any of this as advice... consider this an exercise in understanding public policy.
IRS appears to be largely uninterested in deciding what is and isn't a medical device. Since FDA already does this, they're going to draft off the experts. This approach is best captured in February's NPRM:
Section 4191(b)(1) links the definition of "taxable medical device" to the definition of "device" in section 201(h) of the FFDCA. ... [A]ll devices that are listed under a single product code listing in conjunction with the FDA’s device listing requirement are "taxable medical devices" unless they fall within an exemption under section 4191(b)(2).
FR Vol. 77, No. 25, Pg. 6029
Fair enough... except that you may recall there's a rather large unresolved question regarding whether clinical lab tests are, in fact, a medical device that should be regulated by FDA.
FDA has asserted that it has authority over LDTs but has largely avoided taking any actions that would put this assertion to a serious test. But the key question for tax purposes appears to be whether LDTs have a single product code listing. Do they? Depending on your opinion and your beliefs about the validity of FDA's, you could end up in one of at least three possible scenarios.
The Tilted Playing Field
Labs and FDA continue to act as though LDTs are not devices. Working outside of FDA regulations gains an additional 2.3% built-in pricing advantage over compliance with FDA authority. FDA permanently loses the political will to expand enforcement, as doing so now may constitute a new tax, not just new rules.
FDA eventually deploys enough mojo to finally bring LDTs under its authority. Labs have been fearing this scenario for years, but now it's not just a crash compliance project at stake. Labs could potentially be on the hook for years of back taxes by the time this scenario plays out.
The Voluntary Overpay
Labs hedge their bets and pay the tax. It may be years before they discover whether they made the right bet or not. In the meantime, those who are willing to bet on FDA's weakness will continue to enjoy an advantage. Surely there would have to be some sort of amnesty program, wouldn't there?
Frankly, it's not clear which of these scenarios is the worst. It will be painful to see our tax policy create a perverse incentive to opt out of FDA regulation. On the other hand, you have to feel for the better LDT players who are doing their best to set high standards for the service model. How are they to know what to do next?
Is a device under "enforcement discretion" subject to the "listing requirement" if it has been exempted from the requirement to file? If authority goes unexercised, does it actually exist? The final IRS rule clarifies that it "...deems a device to have been listed on the date the FDA provides written notice to the manufacturer or importer that corrective action with respect to listing is required". But do letters like this one constitute such notice?
And then there's the whole issue of making RUO devices exempt for taxation. If an RUO device is sold into a clinical lab that is selling a service that is later determined to be a medical device...? I think my head just exploded.
It will be interesting to see who even gets to make these decisions when it comes to taxes and how they will be made.