AHLA. O. Tax Issues in Clinical Research. Ann T. Hollenbeck Honigman Miller Schwartz & Cohn LLP Detroit, MI

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1 AHLA O. Tax Issues in Clinical Research Ann T. Hollenbeck Honigman Miller Schwartz & Cohn LLP Detroit, MI Robert F. Waitkus Senior Director of Taxation and Compliance Cleveland Clinic Health System Cleveland, OH Tax Issues for Health Care Organizations October 20-22, 2013

2 Page 1 AMERICAN HEALTH LAWYERS ASSOCIATION TAX ISSUES FOR HEALTHCARE ORGANIZATIONS October 20 22, 2013 Washington, D.C. TAX ISSUES IN CLINICAL RESEARCH Ann T. Hollenbeck Introduction Clinical research trials test potential medical treatments on human volunteers before making these treatments available for use in the general population. After a product is sufficiently tested in a laboratory setting to deem it acceptably safe for human testing, the later stages of testing begin involving human volunteers. Phase 1 trials seek to determine the metabolism and acute side effects of the drug. Phase 2 usually tests a larger group of human participants suffering from the disease the investigational drug or device is intended to treat. The goal of Phase 2 is to gather preliminary data and determine the design of future trials. Next, Phase 3 increases the number of human participants with the disease in order to gather more detailed data about the treatment effects. Both Phases 2 and 3 may involve a control group, either through the administration of a placebo or alternative available treatment. Phase 4 trials usually take place after a drug or treatment is available on the market and seek to determine alternative uses of the drug or potential long term effects of using the treatment. Various purposes and goals may motivate any stage of trials, ranging from curious intellectual inquiry to commercial or industrial interests trying to create a new treatment for a profit. Hospitals and health care organizations today are involved in a wide variety of clinical research activities. Depending on the status of these activities, various contract and business planning choices can have crucial impacts on the tax status of the tax exempt organizations and income derived from clinical research activities.

3 Page 2 Generally, hospitals are defined as public charities under Internal Revenue Code ( Code ) 170(b)(1)(A)(iii) and receive tax exempt status under Code 501(c)(3). A medical research organization engaged in activities in conjunction with a hospital also is a public charity under Code 170(b)(1)(A)(iii). Additionally, an organization may qualify as a scientific organization described in Code 501(c)(3) if its purpose is scientific research carried on in the public interest as defined under Treasury Reg (c)(3) 1(d)(5)(iii). The tax authority and guidance applicable to clinical research is surprisingly unclear. Thus, a bit of background on some terminology is warranted. Scientific Scientific research involves the use of the scientific method, when the researcher makes a hypothesis and designs a project to test this hypothesis, usually using a control group or other widely accepted method in the scientific community. Scientific research is not industrial or commercial research including, for example, activities that help determine the construction, design, or safety of products (Treas. Regs (c) 1(d)(5)(i)). Research The Internal Revenue Service (the Service ) has noted an important distinction between research and testing. For example, activities determining the safety of drugs for FDA approval may be defined as testing, as opposed to preliminary design trials, which may qualify as research. In ITT Research Institute v. United States, discussed below, the court defined activities as scientific research if they (i) involve the use of observation or experimentation to formulate or verify facts or natural laws, (ii) could only be performed by an individual with advanced scientific or technical expertise, (iii) add to the knowledge of a particular scientific field, (iv) involve mathematical reasoning, or (v) attempt to systematize or classify a body of scientific knowledge by collecting information and presenting it in useful form.

4 Page 3 In General Counsel Memorandum 39883, the IRS took three elements and formed a loosely defined three part test, which has its origins in the Midwest Research opinion from the 8 th Circuit Court of Appeals (the case is further described below). The test provides: 1. There must be project supervision and design by professionals; 2. Researchers must design the project to solve a problem through a search for demonstrable truth. This component suggests the use of the scientific method to solve a problem. The scientific method requires the researcher to form a hypotheses [sic], design and conduct tests to gather data, and analyze data for its effect on the verity of falsity of the hypotheses; and 3. The research goal must be discovering a demonstrable truth. Information on the novelty and importance of the knowledge to be discovered is also important to determine whether a particular activity furthers a scientific purpose. Public Interest Requirement Research benefiting the public generally includes research carried out for educational purposes, research to obtain scientific information that will be published and available to the public, or research that discovers a cure or advances a treatment for a disease (Treas. Reg (c)(3) 1(d)(5)(iii)). Research in these contexts is still scientific research for the public interest even if a private entity retains intellectual property rights resulting from the research (Rev. Rul , C.B. 150). In many cases clinical trials and research conducted by a hospital involve another entity that may be a commercial or industrial, for profit entity. These entities may be manufacturers or developers of medical devices, drugs, or biologic products. A hospital engaged in this kind of

5 Page 4 research must be careful to ensure that any income arising out of these studies is tax exempt or that appropriate planning is completed in advance to address potential taxable income. Unrelated Business Taxable Income (UBTI) While income related to the charitable purpose of a Code 501(c)(3) organization is tax exempt, Code 511(a)(1) imposes a tax on unrelated business income. Code 512(a) defines unrelated business taxable income (UBTI) as income derived from an unrelated trade or business regularly carried on by the exempt organization. An unrelated trade or business is defined under Code 513(a) as an activity that is not substantially related to the exercise or performance of the organization s tax exempt purposes. Treasury Reg (d)(1) provides that a trade or business is related to an organization s tax exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of its tax exempt purposes. To be substantially related, the trade or business must contribute importantly to the accomplishment of the exempt purpose. The facts and circumstances of each specific case determine if the activity is substantially related. Additionally, the Code provides the following exceptions to UBTI related to scientific research: Code 512(b)(7) provides:...there shall be excluded all income derived from research for (A) the United States, or any of its agencies or instrumentalities, or (B) any State or political subdivision thereof.... Code 512(b)(8) provides: In the case of a college, university, or hospital, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income....

6 Page 5 Code 512(b)(9) provides: In the case of an organization operated primarily for purposes of carrying on fundamental research the results of which are freely available to the general public, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income.... In the case of Code 512(b)(9), Treas. Regs (b) 1(f)(3) provide that the exception only applies to organizations that engage primarily in fundamental research but not to applied research. When determining what constitutes research, for both Code 512(b)(8) and (b)(9), and what constitutes fundamental research, under Code 512(b)(9), Treas. Regs (b) 1(f)(4) provide: the term research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc. The term fundamental research does not include research carried on for the primary purpose of commercial or industrial application. Due to the varying types and definitions of research, a combination of revenue rulings, private letter rulings and case law provides essential guidance as to the tax treatment of clinical research activities.

7 Page 6 Select Materials Midwest Research Institute v. United States, F. Supp (W.D. Mo. 1983), aff d, 744 F.2d 635 (8th Cir. 1984). In Midwest Research, the IRS challenged the tax exemption of income from nongovernmental work performed by a research organization on the basis that it was not scientific research. To define and distinguish scientific research from other types of research, the court determined that if professional skill is involved in the design and supervision of a project intended to solve a problem through a search for a demonstrable truth, the project would appear to be scientific research. The court noted that this definition included research conducted by mathematicians and economists. This enabled the court to distinguish scientific research from routine and ordinary testing as defined in the regulation. ITT Research Institute v. United States, 9 Cl. Ct. 13 (1985). In ITT Research Institute, the court continued to focus on the scientific method and the technical expertise required to qualify as scientific research in the context of Treasury Reg (c)(3) 1(d)(5)(iii). The court defined science as the process by which knowledge is systematized or classified through the use of observation, experimentation, or reasoning. The court noted that in this case the research was performed by scientists and engineers in one of the oldest nonprofit research institutes in the country. Particularly, the court emphasized that [ITT] was not involved in the commercialization of the products or processes developed as a result of its research. [ITT] would only develop a project to the point where the research principles were established.... The fact that research is directed towards solving a particular industrial problem does not necessarily indicate that the research is not scientific.

8 Page 7 By focusing on the methods and type of researchers and not the end use of the data gathered, the court made additional space for non for profit institutes to partner with for profit entities as long as the greater context of the research was scientific and beneficial to the public. Rev. Ruling , C.B In Revenue Ruling , the Service held that clinical testing of drugs for FDA approval was not scientific research and the income derived was UBTI. In this situation, all of the nonprofit organization s income was derived from assisting pharmaceutical companies with clinical trials required for FDA approval. Although the results of the tests were widely published in medical and scientific journals and highly qualified professionals were required to run the tests, the Service held that the testing was incidental to commercial operations of the pharmaceutical company and therefore not scientific research. Additionally, the Service noted that the research could not be testing for the public safety, under another provision of Code 501(c)(3) because prior to FDA approval drugs are not available to the general public. Given the outcome of this ruling, a similarly situated IRS ruling today following this precedent would likely hold that clinical research income is UBTI. Rev. Ruling , C.B In Revenue Ruling the Service addressed the public interest requirement necessary to qualify as scientific research in the context of publication. Here, the organization performed research studying quality, utilization, and effectiveness. To meet the public interest standard, the Service ruled that commercially sponsored research must be published in an adequate and timely manner. Publication may be delayed during the time necessary to obtain patents or other intellectual property rights, but may not be kept secret beyond this time to protect other business interests. Therefore, even if research qualifies as scientific research, if the results are not made

9 Page 8 generally available after intellectual property rights are protected, it would not be in the public interest and related income would result in UBTI. Private Rulings & Case Law In addition to case law and revenue rulings, the Service has issued several private letter rulings and technical advice memoranda that relate to UBTI in the context of clinical research. In one situation, the Service determined that general testing that evaluated the fire safety characteristics of various materials was scientific research if the results were published, but similar testing that certified materials met building codes was not (I.R.S. Priv. Ltr. Rul (Sept. 29, 1978)). In another ruling, the Service held that clinical trials for pharmaceutical companies researching new applications for existing drugs were scientific research in the public interest, because the trials were not conducted for the purpose of meeting FDA certification requirements (I.R.S. Priv. Ltr. Rul (May 23, 1979)). Here, an important factor was that the testing performed by a medical school for pharmaceutical companies was substantially related to its exempt purposes of teaching and research. The Service identified the following facts in support of its finding: (1) the faculty (not the pharmaceutical companies) developed the protocols; (2) the studies involved the search for new or improved treatments; (3) results were published; (4) the results were used in teaching students of the medical school. In another case with similar facts the Service concluded that clinical testing by a hospital in connection with an asthma drug did not constitute research, the income from which is exempt under Code 512(b)(8) and (9). This conclusion was based on several factors: (1) the experimental method and procedure were largely developed by the pharmaceutical company rather than the hospital; and (2) the testing was part of the FDA approval process. The Service stated that the income would not constitute UBTI if the hospital could have established that the clinical trials

10 Page 9 furthered its exempt purpose of patient care or other exempt purposes (I.R.S. Tech. Adv. Mem (Jan. 16, 1980)). In another case a teaching hospital was able to convince the Service that income derived from clinical drug trials was related to its exempt purpose because: (1) it was designed and conducted by faculty; (2) it was used to aid the instruction of students; (3) the results were discussed at department meetings and sometimes published; and (4) the testing benefited the hospital s patients. Note that the Service determined that the testing not benefiting the hospital s patients was unrelated to the hospital s exempt purposes and therefore UBTI. The Service further concluded that the exceptions provided in Code 512(b)(8) and (9) did not apply because this was ordinary testing incident to a commercial application and not research (I.R.S. Priv. Ltr. Rul ). In St. Luke s Hospital of Kansas City v. United States, 494 F. Supp. 85 (W.D. Mo. 1980), the court concluded that while income obtained from performing pap smears for non patients would normally be UBTI, in this case it was not UBTI because St. Luke s needed a large number smears to provide adequate training and education to its medical students and residents. St. Luke s argued that even though the activity did not benefit patients, it was essential to its teaching mission. The court accepted this argument and concluded that the activity was related to its exempt purpose and not an unrelated business activity. More recently the Service held that clinical trials using new drugs or drug combinations to treat orphan diseases qualified as scientific research because the tests primarily serve to aid those suffering from disease and they add to the body of available scientific knowledge used in finding a cure for it. This was despite the fact that commercial entities may benefit from the research (I.R.S. Priv. Ltr. Rul (Dec. 26, 2008)). Other Contexts

11 Page 10 Other contexts also shed light on the Service s view on the definition of scientific research in the context of related tax questions. In one case, a nonprofit entity formed a for profit subsidiary to conduct clinical drug trials. The organization sought a ruling that the activities of the for profit created a functionally related business under Code The Service concluded that because the research was conducted to cure a disease and the results were to be published, the activities qualified as scientific research in the public interest (I.R.S. Priv. Ltr. Rul (Dec. 3, 2001)). Another instance involved a private foundation that sought a ruling that grants provided for various health care innovations would be qualifying distributions under Code 4942 and not taxable expenditures under Code Because FDA approval would not be the primary activity of the innovations and all results would be published, the Service found that the grants would be used for qualifying scientific research (I.R.S. Priv. Ltr. Rul (Jan. 20, 2006)). In the context of Code 174, the Service advised that Phase 1, 2, and 3 clinical trials were not ordinary testing and the related expenses qualified for a deduction as research and experimental expenditures. The Service stated that research included experimental or laboratory activities, in contrast to testing or inspections for quality control. Although this contrast is not directly on point to the definition of scientific research, it provides a helpful example of how the Service might contrast testing and research when considering clinical drug trials (I.R.S. Tech. Adv. Mem (Nov. 27, 1981)). Analysis The guidance in this area is inconsistent, not to mention confusing and complex. Reconciling the guidance, however, and applying it to the routine facts accompanying the majority of clinical research conducted by a tax exempt health care provider, provides reasonable assurance that most income is not considered UBTI. The analysis requires query into the following questions:

12 Page Is the research related to an exempt purpose of patient treatment, teaching of students, residents or fellows or the research mission (and therefore not UBTI)? 2. Even if not related to an exempt purpose, does the research fall into any of the UBTI exceptions described in Code 512(b)(7) (9)? Given the guidance described above, some general categories of clinical research are more likely to fall under the UBTI. Below is a basic chart sorting out where the UBTI may apply depending upon the facts. Category Likely UBTI? Clinical Trials Pre Clinical Trials Involving new uses of existing drugs Involving hospital s patients Involving academic center students & faculty For FDA approval & none of the previous situations None of the previous situations NO NO NO NO YES YES Practice Notes When a tax exempt hospital or other health care provider is defending its research activities as exempt, whether in court or upon audit, demonstrating the scientific and public interest nature of the research is key. Contract language and documentation will provide helpful support. Below is a checklist containing examples of possible elements to demonstrate that income from research activities is sufficiently related to the tax exempt purposes of the hospital or health care organization. Checklist 1. The rights and obligations of the parties define the research as scientific research. 2. The provisions contain publication rights for the researchers or guarantees by the sponsor, with allowances for reasonable time to protect intellectual property rights and complete patent applications.

13 Page The researcher provided by the hospital assists in developing or monitoring the protocol for the research and managing the data. 4. The clinical trials incorporate the hospital s existing patients. 5. The provisions state the purpose of the clinical trials in language that directly relates to the individual hospital s tax exempt purpose. 6. The clinical trials are structured to involve medical students at related academic institution. 7. The provisions demonstrate how the faculty of a related academic institution will use the clinical trials in student instruction. 8. The provisions contain research objectives of the hospital that are independent of the commercial entity s objectives. 9. The provisions show how the purpose of the trials will cure a disease or advance current medical treatments. Record Keeping Documentation of the research activities is intended to ensure information is retained to defend against challenges that the research activities are not related. Below is a list of information, to be retained by the researchers, that will support the argument that the research was scientific and conducted in the public interest. 1. The results of the trials and related publication. 2. The identity of the principal investigator responsible for the design of the trials and management of the research. 3. Documentation of the scientific purpose of the trials, as defined in the contract. 4. Documentation of the educational benefits of the trials, including student and faculty involvement.

14 Page Documentation of any contributions the trials made to the care and treatment of the hospital s patients, both during the trials and into the future.

15 Page 14 Private Use of Facilities Funded with Tax Exempt Bonds Introduction What are Tax Exempt Bonds? Nonprofit institutions often issue tax exempt bonds to assist in financing long term investments. When a tax exempt bond is issued the holder pays no income tax on any interest earned during the life of the bond. Under Code 501(c)(3), tax exempt organization can issue these bonds to finance facility construction or create other qualifying long term capital investments that are related to the organization s exempt purpose. How Clinical Research May Implicate the Tax Exempt Bonds Status When a tax exempt organization partners with a for profit entity, some of the activities may jeopardize the tax exempt organization s tax exempt benefits. Among these is the tax exemption for interest paid on tax exempt bonds. If the for profit entity benefits from or uses the proceeds or facilities constructed with the proceeds from tax exempt bonds, the tax exemption on the bonds may be lost unless certain requirements are met. It is crucial that any organization using tax exempt bonds for financing carefully consider the impact of engaging in a research partnership with a forprofit entity. Private Use Requirements Requirements for Qualified 501(c)(3) Bonds In order for bonds to be tax exempt they must be owned by a qualifying Code 501(c)(3) tax exempt organization and the proceeds must be used for the exempt activities of that organization. This creates a two part test that all bonds must satisfy.

16 Page 15 Ownership Test The first requirement is the ownership requirement. All property acquired from net proceeds of bond be owned by the Code 501(c)(3) organization or government entity. This requirement is usually easily satisfied. Private Use Test The second requirement of tax exempt bonds is that the proceeds of the bonds must be used for the organization s tax exempt purpose. While the majority of the funds must be spent on the tax exempt purpose, a limited portion may be spent to benefit private business or an unrelated trade activity. If the tax exempt organization is a public organization, up to 10% is allowed; private institutions may only spend 5% minus the costs of issuing the bonds, which usually results in 2 3% of the proceeds available to be used to benefit private business. An unrelated trade activity is any activity not substantially related to the exercise or performance of an organization s tax exempt purpose (I.R.C. 513(a)). An activity is not unrelated if the organization receives no compensation or profits, if the activity is primarily for the convenience of the organization s members, or if the activity involves selling merchandise that is substantially received as gifts or contributions (I.R.C. 513(a)(2)). Private business use is defined under Code 141. Private business use can be as expansive as ownership, actual or beneficial use of property under a lease, management agreement, or incentive payment contract. If a private business uses the property financed by tax exempt bonds this use of facilities is treated as a use of the proceeds. For example, if a hospital enters into a clinical research agreement with a pharmaceutical company to conduct the trials at a hospital building financed with tax exempt bonds, unless the agreement contains a provision preserving the

17 Page 16 public benefit of the research, the tax exempt use purpose would fail because a for profit company has beneficial use of the facility. Safe Harbors Basic Research The Service created a safe harbor for the tax exempt use requirement in Revenue Procedure 97 14, C.B The safe harbor includes basic research pursuant to corporate or industry sponsorship as exempt use, if the research is an original investigation for the advancement of scientific knowledge not having a specific commercial objective. The Service clarified that clinical testing of a product for a specific business did not fall under the definition of basic research. In 2007, the Service updated this safe harbor in Revenue Procedure 07 47, C.B The definition of basic research was expanded to include cooperative business agreements, which meet these requirements: 1. An individual sponsor, or multiple, unrelated sponsors. 2. The government or tax exempt entity determines the type and manner of performance of the research. 3. Title to intellectual property rights result in only the qualified user (the tax exempt entity). 4. The sponsor(s) gets only a non exclusive royalty free license to use any products of the research. Competitive Purchase Price Rev. Proc also stated that there is no private business use if the sponsor purchases the license or resulting technology at a competitive price.

18 Page 17 March in Rights Under Bayh Dole Rev. Proc clarified the impact of march in rights belonging to the federal government in facilities conducting federally sponsored research. The Service announced that these march in rights do not constitute private business use if the safe harbor guidelines otherwise apply. Planning Tips Because of the negative consequences of losing the tax exempt status of bonds, careful planning is necessary when tax exempt organizations enter into research agreements with commercial and industrial for profit entities. First, a tax exempt organization should attempt to avoid engaging in clinical research agreements using a facility that currently has outstanding taxexempt bonds. If this in unavoidable, the tax exempt organization should seek to ensure that the safe harbor under Rev. Pro is satisfied. To that end, a research agreement should address how the goal of the research furthers patient care, and state that the for profit entity may have no beneficial rights to use the property and that publication rights are reserved to the tax exempt entity.

19 Page 18 Medical Device Tax Background Legislative History & Purpose The medical device tax was enacted as part of the Patient Protection and Affordable Care Act (ACA) and amended by the Health Care and Reconciliation Act of The tax is set forth in Code 4191 and imposes a tax of 2.3% on the sale of medical devices by the manufacturer, producer, or importer of the device. Treasury Regulation (c) imposes the payment of the tax on the manufacturer, producer, or importer of the device. The purpose of this tax was to generate revenue to fund portions of the ACA and to spread the costs of medical care throughout the health care industry. What is a Covered Medical Device? The medical device tax applies to any medical device that is intended for use in humans, as defined under Code 201(h) or listed in 510(j) of the Federal Food, Drugs, and Cosmetics Act (FFDCA). This category encompasses devices that can be used in non medical or veterinary contexts. Replacement parts for medical devices are taxed at the rate the user must pay the manufacturer for the part. Software sales and upgrades that are not separately listed with the FFDCA are not taxable. The tax does not apply to services bundled with software products, and advice is forthcoming as to whether the tax applies to each new license of software products (Treas. Reg , Supplementary Information to Final Regulation, pp. 8, 31). What is a Taxable Event? The sale of a covered device is a taxable event. A taxable event also occurs if the manufacturer uses the device in any way other than the manufacture of more covered devices. Then the tax is owed on the amount for which the device would have sold. This tax affects convenience kits when two or more medical devices are packaged together by taxing the devices

20 Page 19 upon sale by the manufacturer, not the sale of the final kit. If a hospital is an exempt self kitter, the use of the self made kit will not be considered a taxable event (Treas. Reg (b)(2)(iv) (example 3)). Exemptions The primary exemption from the medical device tax is the retail exemption. The retail exemption excludes devices available at retail to the general public for individual use (I.R.C. 4191). The devices must be regularly available for purchase by consumers and not intended to be used by a medical professional or in a medical institution or office. Determining whether a device meets the retail exemption is a facts and circumstances test, but the final regulation relating to the tax includes a list of safe harbor products, including FDA designated over the counter products, prosthetic and orthotic devices that do not require implantation or insertion by a medical professional and are eligible for payment under Medicare Part B. Customized items as listed in 42 C.F.R and eligible for payment under Medicare Part B are also exempt (Treas. Reg (b)(2)(iii)(D)). Payments for the sale of medical devices made after January 1, 2013 pursuant to a contract that was in place prior to March 30, 2010 are exempt from the medical device tax, unless the contract was materially modified, including the terms or amount of payment, or the type of property provided, after March 30, 2010 (Treas. Reg (f)). What is Happening Today Since the medical device tax was imposed earlier this year, medical device manufacturers have attempted to pass on the cost of the tax either directly or as a device price increase to medical device purchasers. In some cases passing on this tax may violate previously negotiated contract provisions. It is widely agreed among the provider industry that the tax should not be passed on to purchasers because the intent of the tax was to spread the costs of providing health care to various players in the system (not to concentrate all the costs at the provider or patient level). Purchasers

21 Page 20 of medical devices are currently lobbying Congress to clarify the purpose of the tax by adding this intention to the statute, since the IRS declined to take this position in the related regulation. Set forth below is a template letter for use by a purchaser of medical devices to communicate the purpose of the tax and the purchaser s refusal to pay the tax to a manufacturer who attempts to pass the tax on to the purchaser.

22 Page 21 Template Letter October 20, 2013 Dear Medical Device Vendor: The Health Care Organization, including its member facilities, has reviewed the Medical Device Excise Tax (MDET), imposed on manufacturers of medical devices effective January 1, 2013, as well as the applicable IRS regulations. As you know, the MDET was passed as part of the Affordable Care Act (ACA) as a way to raise revenue so the cost of health care reform would not add to the federal deficit. The ACA's financing measures, which include not only revenue raising measures such as taxes but also payment reductions such as reduced Medicare reimbursement, affect a wide range of industries intended to benefit from health care reform, such as hospitals, home health care agencies, labs, insurance providers, and medical device manufacturers. In passing various taxes and reimbursement measures, Congress intended to distribute the costs associated with providing health care services to 33 million more Americans throughout all affected industries, rather than imposing these costs on any one component of the health care system. Increasing costs to health care providers to deflect the MDET would violate the spirit and intent of the law. Accordingly, the Health Care Organization, including its member facilities, will continue to negotiate the most favorable price available for goods and services. We will not agree to any contractual language that attempts to pass the MDET through to our Organization or to any of its members, nor will we agree to any arbitrary price increases, including but not limited to those inclusive of MDET. We think Congress would agree that the revenue raising purpose of the tax would be undermined if health care providers and the government pay the tax, either directly or indirectly. This notice is intended to preempt any actions on the part of our suppliers to arbitrarily increase prices or to otherwise pass on the MDET to the Health Care Organization. To the extent any of our suppliers fail to acknowledge and follow this procedure, we will seek alternative vendors that will comply with the intent and purpose of the MDET. Thus, any supplier's failure to comply will result in the review of their products that may lead to the termination of our business relationship. Thank you in advance for your support and cooperation.