Straight Talk

“The good news for us is we believe that the new Medical Device Tax applies only to a small segment of our overall business,” said Larry Weiss, president of Keller Laboratories, Inc.

But if the dental laboratory manufacturing domestically made devices is not responsible for paying the Medical Device Tax on the products it sells, who is? Thorn says the onus lies with the manufacturer of the items that the FDA requires to be listed as a device such as the porcelains, alloys, and acrylics the laboratory purchases and uses to fabricate the crowns, bridges, veneers, and dentures it produces and sells. “It makes sense that if the materials the laboratory purchases are FDA approved classified materials and deemed safe for the patient, then the [materials] end product will be patient safe.” That does not mean in the end laboratories would not be affected by the tax. It is possible they will be indirectly paying the tax if manufacturers raise prices on the taxable materials sold to the industry, which seems likely.

Importers/repackagers/relabelers of medical devices manufactured offshore, however, will bear the burden of the new Medical Device Tax. Patrick Tessier, CEO of Modern Dental Laboratory USA, an FDA-registered importer of medical devices, praises the NADL for its legal work but cautions, “By taxing only listed medical devices, the government is leaving more than $100 million dollars of revenue in uncollected taxes. Let us hope the FDA and IRS don’t change their minds.”

Modern Dental is prepared to pay the 2.3% Medical Device Tax on the restorative dental products it imports into the United States. “By paying the tax, we believe we are fulfilling our obligation to the government and protecting the best interests of our clients. We don’t want to be on the wrong side of the IRS,” says Tessier.

Although the final ruling by the IRS has sent a momentary collective sigh of relief throughout the dental laboratory industry, the exuberance felt by the majority of dental laboratories in the United States that are manufacturing domestically produced products is not being shared by those businesses directly or indirectly importing products from overseas. For these operations, doing business overseas has just become much more costly and more transparent. Although it has always been mandatory for laboratories in the United States importing offshore dental devices to register with the FDA, there was, until now, no annual fee attached to the registration obligation. That has changed. Now laboratories importing devices from offshore must register and pay the annual registration fee from which they had been previously exempt (see FDA Registration Fee Schedule sidebar). The new ruling also requires that both offshore exporters and domestic laboratories in receipt of offshore products register with the FDA online using FURLS (Unified Registration and Listing Systems). Not only are importing laboratories subject to paying the current annual FDA registration fee, but they now must also pay the 2.3% Medical Device Tax on each crown, bridge, denture, or veneer they import and sell.

Further, the FDA took steps to make it much more difficult for those businesses in the United States importing offshore medical devices to remain undetected by FDA radar. As of October 1, 2012, offshore exporters of dental devices must register with the FDA and list the US customer receiving the device, including company name, address, phone and fax numbers, website, and FDA registration number if known. “Requiring the offshore manufacturer on the front end to tell the FDA who is receiving the product on the back end is allowing the FDA to build a database of US companies importing devices into the United States,” says Thorn. “The FDA can then cross-check that information against known registration numbers.” If the crosscheck uncovers a business importing from overseas but not registered with the FDA, it will trigger an automated letter from the FDA. “Typically, The laboratory will have 30 days to respond to the letter before incurring a fine,” says Thorn.

In the final rule issued in December, the IRS disregarded requests from Federal Register commenters to waive tax penalties relating to filing the Medical Device Tax IRS Form 720 because of the compliance challenges it presents. The IRS responded that penalties would be imposed unless the business can demonstrate that the failure to pay was due to a “reasonable cause and not willful neglect.” Information on businesses importing foreign-made medical devices into the United States will also be made available to the public through the FDA website.

The impact of the new FDA rule imposes unprecedented transparency on the import trade process. For businesses in the laboratory industry and on the clinical side of dentistry that have attempted to skirt transparency through technicalities in the law, the loopholes appear to be closing quickly. “If there are laboratories or entities on the clinical side that are importing devices from offshore but have not yet registered with the FDA, or are not labeling these products as “Manufactured by” or “Distributed by,” then they are in clear violation of existing FDA registration and repackaging laws,” says Thorn. “As of January 1st, they now may also be in violation of the new IRS law by not filing returns for and paying the Medical Device Tax.”

Claus Dampmann, general manager of Pro-Lab Solutions Inc., a US-based, FDA-registered outsourcing operation, has been advising his clients of the new obligations. “A large percentage of the cases we ship overseas are drop-shipped back to our US customers,” says Dampmann. “For those cases our offshore laboratory identifies the US laboratories as the importer.” Smaller case lots from individual laboratories get bundled together and shipped back to Pro-Lab. The unbundled cases are then sent via FedEx to the company’s individual clients who are by law liable for paying the 2.3% Medical Device Tax and for registering with the FDA as an importer. He believes that the tax will not impact most of his clients, as they will pass the tax on to their dentist customers. And for Pro-Lab’s large-volume customers, absorbing the annual FDA registration fee will be perceived as simply the cost of doing a large-volume business. “We are most concerned with our smaller clients who are getting hit with that $2,575 annual FDA
registration fee,” said Dampmann.

The crackdown by the FDA on imported goods to better ensure consumer health and safety and the federal government’s intent to find and collect new sources of revenue are two new federal initiatives signaling the stiffening and escalation of the rules of engagement for conducting business in the dental laboratory environment. “We are at a crossroads in this profession,” says Gary Iocco, president of Dimension Dental Design, CDL. “It is critical that laboratory owners keep pace with the regulatory changes taking place in this profession in terms of compliance and other business issues. The ramifications for not doing so are ominous.”

As the fog surrounding import transparency lifts, those businesses engaged in offshore activities will continue to warrant greater scrutiny from the FDA. “The FDA has increased its number of investigators and will be inspecting more offshore entities as the importer and/or businesses that have registered,” said Weiss, whose FDA-registered laboratory has been inspected twice in the last 2 years. But as Weiss points out, it is not only registered or importing laboratories that have caught the attention of federal agencies, but also the industry as a whole. “Once you invite regulation—whether from the local, state, or government level—the door is open,” he says. “And there is a great deal of administrative work to maintain that compliance.”

At the most basic of levels, any dental laboratory doing business in the United States has been required since 1997 to demonstrate compliance with FDA good manufacturing practices and quality systems. Many laboratory owners have assumed that because their businesses are neither involved in the manufacture of Class II medical devices nor importing offshore products, they therefore do not have to register with the FDA and are immune from FDA scrutiny. But that is hardly the case. Because the Class I and Class II materials a laboratory uses in the manufacture of the medical devices it sells are being used in a patient’s mouth and by law are regulated by the FDA, businesses using these materials must demonstrate their compliance with FDA manufacturing standards.

“The risk today for an FDA audit is much greater than 5 years ago,” says Nick Azar, founder of Azar & Associates and a DAMAS-certified trainer. “If you want to be in the laboratory business today, you must be accountable for how you are operating your business in the name of patient safety.” A majority of laboratories, he says, have some form of quality control system and general management practices (GMPs) in place for addressing common problems or day-to-day operations such as remakes, complaints from clients, equipment maintenance, employee job descriptions, and training regimen for technicians. The problem, he says, is that the paper trail for each of these routines—as well as documentation from the vendors of materials and equipment used in the manufacturing process to demonstrate that they, too, are compliant with FDA GMP practices—is missing. Not having a documented plan or standard for your business operation in order to be able to trace the source of a problem should it arise is in non-compliance with FDA regulations.

And not being able to trace the source of a problem should one arise or know what was used in the manufacture of a dental restoration—particularly in light of the increase of offshore production—has prompted a number of state legislatures to enact laws requiring laboratory registration, material content, and point of origin disclosure.

“Small and medium-size laboratories that are registered with the FDA but have not documented their processes and activity will soon discover what regulation really means,” says Weiss, who is not in favor of increased regulation.

Iocco, who was instrumental in pushing through laboratory regulatory legislation in Minnesota requiring that country of origin and material content be specified for each case, argues that state and federal regulations are helping level the playing field for those laboratories that are operating in compliance with the law. “We have to ensure that the materials being used in dental laboratories are not only safe for the patient but compatible with each other to prevent restorations from failing,” he says. “There are still businesses in our industry that are violating FDA GMPs by using materials outside the recommendation of the manufacturer. These types of practices always put our profession in jeopardy in terms of material failure.” He also is an advocate of transparency in terms of material content and country of origin for the end user and patient.

But individual state pay-to-play registration fees and regulatory standards hamper the ability of small operations to do business in other states. “The challenge with individual state registration and regulation is that the cost of doing business really hammers small businesses,” says Leon Hermanides, owner of Protea Dental Studio. “Not only does it drive up costs, but the regulations in each state are different, costing laboratory owners valuable time trying to keep compliant with the individual regulations.”

And keeping current with the different regulations and the penalties that are attached to some should the regulations not be met is a problem Weiss has with increased regulation. “The fees are one thing. My greater concern is for those that have financial penalties attached if a particular regulation is not met in full,” says Weiss, whose laboratory is registered in many states.

Hermanides would be in favor of regulatory legislation at the federal level that mandates registration of dental laboratories doing business in the United States, but concedes with only 12 states thus far having any legislation in place, attempting anything at the federal level lacks the support at this point in time. “In the end I think federal regulatory bodies like OSHA, the IRS, and FDA will eventually be the keepers and generators of a regulatory database for our industry.”

As with any new federal regulation or imposed tax, there are still areas of interpretation that need further definition. The IRS has left the door open for further interpretation and definition with the statement: “The proposed regulations provide that if a device is not listed with the FDA but the FDA later determines that the device should have been listed as a device, the device will be deemed to have been listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.”

For dental laboratories, one of the large gray areas looming on the horizon is the manufacture of custom implant abutments. “The current FDA Class II medical device code applies only to stock implant abutments commercially available from manufacturers,” says Thorn. There has been no ruling on those abutments being custom designed and milled by manufacturers, individual laboratories, or domestic milling centers. “In our last meeting with the FDA, they did take a look at the manufacture of custom implant abutments by domestic laboratories and milling centers,” explained Thorn. “They were not sure where the regulation should be applied, whether to the CAD software or to the end product.” Since, in the past, the FDA has not regulated the manufacture of custom implant abutments made either conventionally or digitally, laboratories and milling centers making these devices have not been required to register with the FDA. In cases like this, the door may still be open for FDA clarification.

And that fact has Hermanides speculating that if the federal government does not geneate the projected revenue from the new Medical Device Tax as expected, they, along with the FDA, will reexamine what is considered a medical device. “The door is still open to interpretation. And there is no doubt that local, state, and federal governments are intent on finding new sources of revenue.”

Tessier agrees. “There is more pain to come as all government agencies are struggling for funding,” he says. “In the end, a 2.3% tax on a $100 crown from Modern Dental is not going to make a dramatic difference in a dentist’s buying patterns. But if this tax and FDA registration were ever point-loaded at the laboratory level, then the result would be devastating for business.”

Any domestic laboratory importing medical devices directly or indirectly from offshore, including those that work through a US broker or agent.

Any dental laboratory manufacturing Class II medical devices.

Any foreign manufacturer of medical devices intended for human use and importing into the US.

Any business that acts as an agent, broker, or initial importer for foreign laboratories exporting medical devices manufactured overseas.

Who Must Pay the 2.3% Medical Device Tax?

Any laboratory manufacturing or importing medical devices required by the FDA to be listed as a device (ie, sleep apnea devices, snore guards, or imports).

Any laboratory repackaging/relabeling and selling any medical device manufactured by a foreign laboratory.

A growing trend in the dental laboratory industry is to sell kits to clients along with the restorative device. Examples would be a collection of tools sold with a sleep apnea device to help the clinician fine-tune the shape of the delivered device or a package of cement and solvent delivered with a finished veneer. According to Thorn, any laboratory assembling two or more devices in kit form for sale to clients would come under the definition of “manufacturer.” The IRS did not include the proposed rule language regarding kits in the final rule but in a separate notice did address kits and established an interim rule. While no tax will be imposed on domestically produced kits until further notice from the IRS the sale of a taxable medical device that goes into a kit will still be subject to tax upon its sales by the manufacturer or importer and imported kits will also be taxed.