Seems a funny time to be mulling over the possibility, with the government throwing money around. But the circuitous logic of Washington often is to rob Peter to pay Paul (where do you think that $20 billion in funding is coming from?) so there’s endless possibilities.

Tucked into the health care reform bill is a 2.3 percent excise tax on medical devices, set to go into effect in 2013. Doesn’t sound like much, unless you’re in the medical device market, and it didn’t get much media play, but government wonks project the tax will raise about $2 billion annually--money earmarked to offset a sliver of the costs of the reform legislation. Experts predict that device manufacturers will, as logic dictates, try to find imaginative ways to pass the costs on the consumers and the middlemen, device suppliers. (Click here for a nice synopsis.)

Legislative moves like this excise tax send a chill down my spine because of the seemingly endless and indiscriminate use of taxes, fees, unfunded mandates, etc. to shift money from here to there. Chicago (my hometown) always needs more money to feed the budget beast. So they raise taxes on hotel rooms. And license plate renewals. And fishing licenses. And liquor and candy. The aldermen, like their counterparts across this nation, pick and peck until the numbers pass muster. Stabs at cost reductions are made, but they never seem to equal projections or slow the rise of annual budgets or stem the tide of red ink.

Taxes and other fiscal gymnastics increasingly are uncoupled from any type of cause/effect relationship (for example, car and trucks tear up roads, therefore taxes/fee on auto services are raised to fund road improvements). Tax bodies are looking for the easiest targets. But try as they might, federal and state budget numbers still aren’t making a whole lot of sense, and we’re back on this endless wheel.

The feds perceive EHRs as the backbone of a potential national health infrastructure that will use health information exchanges to plug everyone--patients, provider, insurers, government health agencies, etc. and etc., into one ginormous health entity.

Fair enough. But when the grant funds run out, the feds and states are going to look for sustainable revenue streams. Say someone in Washington or a state capital does connect some dots and decides that HITECH has artificially expanded the EHR market, and since there are some deep-pocketed vendors supplying that market, they should gratefully pony up by paying some form of tax on their products.

Take it a step further and make an argument that consumers are enjoying the benefits of EHRs and data exchange. And there are all kinds of ways to get into their pocketbooks … have you looked at your phone bill lately? Mine has a couple interesting line items:

  •  Regulatory Cost Recovery Charge
  •  Federal Universal Service Charge
  •  Municipal Telecom Tax
  •  State/Municipal Telecom Tax

The fact is that someone, somehow, someway is going to have to pay for our nation’s largesse. As we try to shoulder the enormous federal debt load, federal economists are inevitably going to look for fresh targets to slap with taxes and fees that can provide the many billions needed to prop up the federal health machine.

 Alas, there’s another way for the feds to tax EHRs and other clinical software, and it’s a sort of backdoor that they’ve been trying to pry open for years.  EHRs aren’t medical devices. Or are they? The Food and Drug Administration seem to think so, which is why the agency has doggedly pursued ways to add EHR regulation to its host of responsibilities. If it succeeds, electronic records will fall into a new category that could make it easier to target (see excise taxes, medical devices).

 The FDA defines a medical device as:  an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them; intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in human or other animals, or intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.

 In February 2008 the FDA rattled some cages by issuing a proposed rule for regulating medical device data systems (MDDS), defined as software that transfers, displays, reformats or stores data from a medical device without acting upon that device. The rule proposed to classify MDDS as a Class 1 medical device, the lowest risk category, but would require vendors to comply with FDA-issued quality and design controls. (For more information, see The Gray Sheet.)

 And as we reported, Sen. Charles Grassley (R-Iowa) earlier this year sent a letter to HHS Secretary Kathy Sebelius with musings about whether EHRs might need some regulatory oversight. That was a follow-up to a letter Grassley’s office sent to EHR vendors and provider organizations about the use of contract clauses that he suspects might be stifling dialogue about EHR defects (see our April cover story here).  

Industry associations have fought back against regulation, but it’s going to be increasingly hard to stem the tide. It seems nearly inevitable that an EHR tax is coming, through the front door or perhaps in a stealthier, regulatory fashion in the form of a medical device tax.

Something wicked this way comes. Bank on it.


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