Threat of med device tax on mHealth dominates initial House hearing

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The regulation of mobile healthcare apps and devices could trigger a 2.3 percent excise tax required by the Affordable Care Act, hampering innovation by the budding mHealth industry, according to testimony at Tuesday morning's hearing of the House Energy and Commerce Committee's Subcommittee on Communications and Technology.

Rep. Greg Walden (R-Ore.), chairman of the Energy and Commerce Committee's Subcommittee on Communications and Technology, said the "specter" of costly and time-consuming regulations as well as the 2.3 percent excise tax "looms large" over the mobile healthcare industry. The wireless economy makes a "tempting target" for the tax that Obama administration's Affordable Care Act places on medical devices, he stated. 

"While the IRS and FDA have provided some draft guidance on how they will apply the medical device definition and medical device tax, their analysis is not a poster child of clarity and leaves large parts of the economy wondering if they will be on the hook for what is essentially a tax on innovation," Walden charged.

However, ranking House Energy and Commerce Committee member Rep. Henry Waxman (D-Calif.) took exception with his Republican colleagues and their assertion that the FDA is "hoping to subject smartphones and tablets to the medical device tax." GOP allegations that "ordinary" smartphones and tablets would be subject to additional red tape or new taxes under the ACA are "absolute myths," Waxman said.

"In fact, the FDA's draft guidance specifically states that the agency does not intend to regulate distributors of mobile medical apps like the iTunes store, or makers of smartphones or tablets like Apple," he stated. "Smartphones and tablets are not listed with the FDA as medical devices so they are completely outside the scope of the medical device tax."

Waxman also said that it was his understanding that most mobile medical apps would also be exempt from the medical device tax because of the IRS "retail exemption" provision, under which devices are exempt from the tax if they are regularly available for purchase and used by ordinary consumers and not primarily intended for use in a medical institution or by a medical professional.

He accused Republicans of "using today's hearing to invent new fallacies to attack the Affordable Care Act" in order to "serve a political point of view."

Nevertheless, George Ford, chief economist of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, testified that the Affordable Care Act levies a 2.3 percent excise tax on medical devices, and the FDA's final regulation of mobile apps, expected later this year, is likely to label such apps as medical devices.

"Economists would broadly agree that such taxes will reduce the rate of innovation and the introductions of new mobile medical applications and devices by lowering the returns on such innovations," said Ford. "Taxes may or may not raise revenues, but they always discourage the activity being taxed. 

The medical device tax would impact investment in healthcare innovation, according to Dr. Teo Forcht Dagi, partner at Boston-based healthcare venture capital firm HLM Venture Partners.

"We believe Congress did not intend to burden emerging [mobile medical application] companies with this new tax since their products aren't included in 'traditional' medical devices," Dagi said. "The 2.3 percent tax on revenue has already started to have a detrimental effect on early stage medical device companies. It creates a major market inefficiency by increasing the capital intensity of innovation, and affects the ability of venture capitalists to invest in these companies in the future. This tax would be even more devastating for companies developing MMAs."

Dagi said that his firm believes MMAs that are defined as medical devices should be exempted from the Affordable Care Act's medical device tax. He also argued that Congress should repeal the entire tax "because of the impact it is having on emerging growth companies." 

Benjamin Chodor, CEO of New York-based mHealth provider Happtique, testified that his company does not believe the medical device excise tax should apply to any phones, tablets or mHealth apps. "Any application of the tax to these products would be beyond what Congress intended and would serve to slow innovation by placing burdensome costs on apps developers in a new and growing market," stated Chodor.

He agreed with Rep. Waxman's point that the IRS's retail exemption provision applies to mHealth apps and the devices that run on them. "If the IRS wants to implement this tax on this technology, Congress needs to pass a law that specifically states that the tax applies," Chodor said.

Today's subcommittee hearing was the first of three days of hearings this week on mHealth issues.

To learn more:
- read written testimony from the hearing

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