The recently enacted federal Patient Protection and Affordable Care Act of 2010, as modified by the Health Care and Education Reconciliation Act of 2010, contains several provisions of special interest to medical technology companies. Here are some key points to remember.
Taxes Are Going Up
As expected, the Health Care Act includes a provision imposing a 2.3 percent excise tax on sales of medical devices by manufacturers, producers, and importers. Taxable devices include any medical device defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act and intended for use by humans, with limited exclusions for devices purchased by the general public at retail for individual use, such as eye glasses.
It is important to note that there is no general exclusion for class I medical devices, so these devices will be subject to tax unless the Internal Revenue Service identifies the particular device as excluded. Manufacturers must begin paying the tax in 2013. There is no exemption for small companies or cap on the tax, though the tax is deductible.
Manufacturers Are Under the Microscope
Legislation that had been pending in Congress for several years, known as the Physician Payments Sunshine Act, was included in the Health Care Act. Under the new law, drug and medical device manufacturers and medical supply and biologic companies will have to report all payments and transfers of value made to physicians and hospitals that exceed $10. Reported information will be available to the general public. A number of states have enacted or are considering similar transparency legislation.
The industry hoped that the federal law would expressly preempt state reporting laws to reduce the administrative burden on reporting companies. The Health Care Act did contain a preemption provision, but it is limited in scope. Where the federal law requires reporting of the same information as applicable state law, the state law is preempted. Where the state statute requires reports of different information, manufacturers will have to comply with both state and federal law. The new reporting requirements are applicable to payments made in 2012.
Comparisons Are Inevitable
The Health Care Act supports the use of comparative effectiveness research by establishing a nonprofit Patient Centered Outcomes Research Institute to perform such research. The stated purpose of the comparative effective provisions is to identify priorities for such research and measure clinical outcomes, rather than setting mandates, guidelines, or payment or coverage criteria.
Startups May Get Extra Credit
Small to midsized companies may qualify for significant tax credits or grants for qualifying therapeutic discovery projects. The new Qualifying Therapeutic Discovery Project Credit equals 50 percent of the aggregate costs paid or incurred in a tax year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery. The investment must be or have been made in 2009 or 2010.
Qualifying therapeutic discoveries include projects to (a) treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies to secure approval of prescription drugs and biologics, (b) diagnose diseases by developing molecular diagnostics, or (c) develop a product or technology to further the delivery of therapeutics. Eligible companies may have no more than 250 employees. Companies can apply for a grant in lieu of the credit, which will be helpful for early stage companies that lack sufficient taxable income that can be offset by a credit. The program is slated to begin May 21, 2010.