The one-year-old health reform law calls for an excise tax on medical device companies to help pay for the costs of reform, but hospitals and group purchasing organizations worry that the impending tax will end up being a "windfall" for device companies, and just passed along to consumers or dodged, therefore raising health care costs.

Device makers in turn call the argument "baseless" and have called for the tax's abolition, fearing it will curb innovation, short-circuit job growth and fall heavily on small businesses.

In an open letter to the Internal Revenue Service, three hospital groups and the country's main GPO lobby said the 2.3 percent excise tax on sales for device companies was set up as a way to ensure device companies paid their fair share for the costs of reform. The hospitals said they agreed to help with $155 billion in contributions over the next 10 years, largely through reductions in Medicare.

But the groups, which represent just about all American hospitals, fear medical device companies will treat the tax as a "windfall" with a "double-dip" -- that is, they could deduct the tax from their income for federal corporate taxes, while at the same time passing through the tax to their customers with higher prices.

"This 'double-dip' could place device companies in a better financial position than they were prior to health reform, while transferring their financial commitment onto other health care stakeholders," the groups wrote. Signatories to the letter include the Federation of American Hospitals, the American Hospital Association, the Catholic Health Association of the United States and the Health Industry Group Purchasing Association.

The hospitals and GPOs argue that in many cases, the tax code prevents companies from passing the cost of an excise tax onto customers while also seeking a refund, unless it has already repaid the tax to the customer or obtained their consent. For the IRS to make sure medical device companies don't avoid the tax, the groups suggest having the companies certify on their tax returns that no part of the excise tax was passed down the line.

But device makers scoffed at the notion that the tax could be a "windfall." In its own letter to the IRS sent this week, the device lobby Medical Device Manufacturers Association argued the tax will stymie medical innovation, job growth and profits, with the burden falling especially hard on small companies.

"The medical technology industry is dominated by small businesses, which are the engine of job creation in this country. Approximately 80 percent of the companies in the medical technology industry have fewer than 50 employees, and 98 percent of the companies have less than 500 employees," MDMA's President and CEO Mark B. Leahey said in the letter. "Administrative guidance should minimize to the fullest extent practical any obligation to alter existing financial and recordkeeping systems and business practices, including the manner in which manufacturers interact with their customers. Otherwise, the financial burden of complying with the new law will divert precious resources away from the necessary investments these companies make in research and development that eventually lead to more effective and less costly health care for all Americans."

Also in the letter, the device lobby asked for a one-year delay on implementing the tax if efforts to scuttle it fail in Congress. The tax, which is meant to raise about $20 billion over the next 10 years, takes effect in 2013.

"[W]e believe that meaningful, comprehensive and workable guidance will take far longer to develop," Leahey said in the letter.

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