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The new administrator for the ABC Medical Clinic understood that all inventory costing methods were acceptable to use in his Durable Medical Equipment [DME] department. LIFO, FIFO, specific identification, and the average cost method are all attractive methods under different circumstances in the business cycle, and companies may use the method that best fits their circumstances.

Reducing Taxes

For example, if ABC wished to reduce corporate income taxes in a period of inflation and rising prices, it would use LIFO. If matching DME sales revenue with the current cost of DME goods sold was desired, LIFO would also be used. Unfortunately, LIFO may charge against DME revenue the cost of DME not actually sold, and LIFO may allow the ABC Medical Clinic to manipulate net income by varying the time-periods it makes additional DME purchases. On the other hand, FIFO and specific identification method allows a more precise matching of ABC revenue with historic DME costs. However, FIFO too, can promote “paperless-phantom profits,” while specific identification can promote possible income manipulation.  It is only under FIFO that net income manipulation is not possible.

CEO – 2 – CFO [Case Model]

“Let’s go with FIFO,” the new administrator said to his Chief Financial Officer, Bert. “The profits will make us look good to the home office and we can always switch back to LIFO if inflation starts back-up again, right Bert?” He mused, but he was not amused because freedom of choice does not include changing DME inventory methods every few years, especially if only to report higher income. “The switching of methods violates the basic tenet of consistency, which requires the use of the same inventory cost and accounting methods in preparing financial reports and statements,” Bert emphatically stated.

Key Issues

1) Is this sort of inventory costing and maneuvering permissible?

2) What is its justification?

3) How is it notated in financial reports?

4) Is this sort of thing ethical?


“The switching of methods violates the basic tenet of consistency, which requires the use of the same inventory cost and accounting methods in preparing financial reports and statements,” Bert emphatically stated.


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6 Responses

  1. Why stop at 2.3%?

    To uninformed Americans, the 2.3% medical device excise tax must seem like a painless way to fund the increasingly expensive Affordable Care Act. And since patients are more likely to blame providers rather than politicians for the increased treatment costs, where is the incentive to stop at 2.3%?


    Will common sense cause repeal of the excise tax? Or will lawmakers continue to increase the cost of healthcare to pay for the increased cost of healthcare? I still like to think that as long as there is transparency in healthcare, common sense stands a fighting chance.



  2. Justice Department Investigating Doc-owned Distributorship

    Federal investigators are pursuing what may be the first enforcement action against a surgeon involved in a controversial type of medical device firm known as a physician-owned distributorship (POD). The probe follows scrutiny by the government into the impact of these PODs on patient care and costs. Last year, HHS’ Office of the Inspector General published a national alert warning doctors and hospitals about the patient safety dangers and fraud risks of buying surgical products from PODs, which are medical device companies that generally have surgeons as owners or investors.

    In a typical POD arrangement, physicians own or have a financial interest in the POD. The hospital where those doctors have staff privileges buys equipment from the POD and provides it to the doctors to perform procedures. The government’s concern is that this creates a financial incentive for physician owners of PODs to perform more procedures. Traditional medical device-makers, whose business has been hurt by PODs, say the physician-owned entities are involved in a clear conflict of interest, because the doctors who implant the devices stand to profit personally when hospitals buy equipment.

    Source: Jaimy Lee and Joe Carlson, Modern Healthcare [3/11/14]


  3. Don’t Expand Medicare Bidding Program

    Devicemakers and lawmakers are asking the CMS to not move forward with plans to expand Medicare’s competitive bidding program for durable medical equipment, an initiative that both the government and advocates say can reduce costs by billions without cutting access to equipment for beneficiaries.

    The CMS estimates the program has saved Medicare $400 million the first two years of operation and projects it will save another $17.2 billion for beneficiaries and $25.8 billion for the Medicare program over the next 10 years. The Patient Protection and Affordable Care Act mandated an adjustment to the fees being paid for durable medical equipment beginning Jan. 1, 2016.

    Source: Virgil Dickson, Modern Healthcare [4/4/14]


  4. CMS Announces Next Phase in Medicare DMEPOS Competitive Bidding

    The Centers for Medicare & Medicaid Services (CMS) today announced the bidding timeline for Round 2 Recompete and the national mail-order recompete of the Medicare Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bidding Program, as required by law. CMS also launched a comprehensive bidder education program. This program is designed to ensure that DMEPOS suppliers interested in bidding receive the information and assistance they need to submit complete bids in a timely manner.

    The DMEPOS Competitive Bidding Program changes the amount Medicare pays for certain DMEPOS while maintaining beneficiary access to items and services and quality of care. The program replaces the outdated, inflated fee-schedule prices Medicare paid for these items with lower, more accurate prices to help Medicare and its beneficiaries save money while ensuring access to quality equipment, supplies, and services. This program also helps limit fraud and abuse in Medicare. CMS is required by section 1847(b)(3) of the Social Security Act to recompete contracts under the DMEPOS Competitive Bidding Program at least once every three years.

    Source: CMS [12/11/14]


  5. Top Five Medical Device Companies by Revenue

    1. Johnson & Johnson (NYSE:JNJ)
    2. GE Healthcare (NYSE:GE)
    3. Medtronic (NYSE:MDT)
    4. Siemens (OTCMKTS:SIEGY)
    5. Philips Healthcare

    Source: Investing News Network


  6. Amazon Poised to Deliver Disruption in Medical Supply Industry

    Amazon is on the healthcare industry’s doorstep. The e-commerce giant continues to transform virtually every segment of the economy as it leverages its massive distribution network to deliver logistical harmony. With a stronghold on the consumer market, Amazon is eyeing the business-to-business segment as it builds its seller base. Soon, that familiar smiling brown box will make its way from porches to providers’ front doors and that may make for some disgruntled medical supply distributors.

    Of note in its business platform, Amazon’s growing presence in the medical supply segment is poised to disrupt distributors. Similar to the “Amazon effect” felt in other industries, a downward pricing pressure will eat away at profit margins and cause distributors to adjust accordingly. Amazon Business features an array of medical supplies including infusion pumps, catheters, IV bags, sutures, forceps, hospital beds, scalpels, and other lab items. One of its “most wished for” items is a 10-pack of syringes with blunt tip needles and caps for $8.39.

    Source: Alex Kacik, Modern Healthcare [6/10/17], via PM magazine


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