[Congressional Record Volume 155, Number 134 (Tuesday, September 22, 2009)]
[House]
[Pages H9778-H9780]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                    TAXING MEDICAL DEVICE COMPANIES

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Indiana (Mr. Souder) is recognized for 5 minutes.
  Mr. SOUDER. In my district there is a wonderful little town of around 
12,000 people called Warsaw, Indiana. It's in Kosciusko County, a 
county with 100 lakes, including our biggest natural lake in the State 
of Indiana and many other sizable lakes. Tippecanoe, Syracuse, Webster 
Lake, North Webster, Big and Little Chapman as well as many other 
lakes. At this point I would like to insert into the Record from The 
Wall Street Journal ``Sticks and Stones May Break Bones, but Warsaw, 
Indiana, Makes Replacements.''

             [From the Wall Street Journal, Oct. 26, 2006]

Sticks and Stones May Break Bones, but Warsaw, Ind., Makes Replacements

                          (By Timothy Aeppel)

       Warsaw, IN.--When Don Running and his two partners decided 
     to start up a company specializing in orthopedic plates and 
     screws to mend broken wrists two years ago, it was a given 
     that they would set up shop here.
       Silicon Valley has computers. Detroit has cars. But in 
     orthopedic devices, the undisputed world capital is Warsaw, a 
     city of 12,500 with a silver-domed 19th-century courthouse 
     and pickups angled into the curb on Main Street.
       Three of the world's five largest makers of artificial 
     joints and related surgical tools have their headquarters 
     here amid the lakes and fields of northeastern Indiana. The 
     local industry has grown so much that it's now a regional 
     force, with orthopedics companies popping up in nearby farm 
     towns and the suburbs of Fort Wayne, about 50 miles to the 
     east.
       ``How many orthopedic-implant engineers do you find walking 
     around most places?'' asks Mr. Running. ``Well around here, 
     you bump into them in the supermarket.''
       Memphis, Tenn., and northern New Jersey are other industry 
     hotspots, but none rivals Warsaw for sheer concentration. And 
     while major orthopedics companies are looking overseas for 
     cheaper places to produce items such as basic bone screws and 
     metal plates, the U.S. retains a firm grip on the industry.
       A big reason is that the U.S., with its population of fast-
     aging baby boomers, injury-prone weekend athletes and 
     overweight people, is by far the world's biggest market for 
     artificial hips and knees. The U.S. represents an estimated 
     $14 billion of the annual spending in a global market of 
     $22.9 billion, according to Knowledge Enterprises Inc., a 
     Chagrin Falls, Ohio, market research firm.
       The U.S. also effectively protects manufacturers in the 
     sector with strict regulations for devices that go inside the 
     human body. Rather than risk problems--and crippling 
     lawsuits--U.S. health-care providers buy their artificial 
     joints from companies they know, which generally means buying 
     American.
       Profits are so good in the orthopedics industry that there 
     isn't much pressure on suppliers to shave costs by going to 
     low-cost

[[Page H9779]]

     countries. ``The reason this business is in Warsaw and not 
     Mexico is because margins are 70% or better,'' says Ron 
     Clark, an orthopedic surgeon who founded his own company in 
     Fort Wayne, which is on the other side of the state from his 
     home in Valparaiso, in part so he could be closer to Warsaw. 
     Dr. Clark says savings from going abroad just aren't worth 
     it.
       To be sure, the industry's dynamics may be starting to 
     change. Health-care providers are starting to push back 
     against the industry's steady price increases, raising 
     concerns among investors about whether profits for Warsaw 
     companies and others can keep up the brisk growth.
       There are other shadows over Warsaw's future. The U.S. 
     Justice Department has opened two probes of orthopedics 
     makers in the past two years, including an antitrust 
     investigation in which Smith & Nephew PLC, of the U.K., has 
     confirmed that one of its independent sales representatives 
     tried to initiate an industry-pricing strategy in response to 
     a U.S. hospital's bid request. Other producers, including 
     those in Warsaw, have said they didn't respond to the 
     suggestion.
       The big implant makers also received a separate batch of 
     subpoenas in early 2005 regarding an investigation of any 
     financial ties between them and surgeons who recommend their 
     products. Doctors work closely with device makers to develop 
     and refine artificial joints, and the companies have long 
     paid surgeons as consultants and designers.
       At least for now, though, Warsaw's orthopedics businesses 
     continue to hum. The industry got its start here over a 
     century ago, when a Canadian pharmacist, Revra DePuy, came up 
     with the idea of making flexible splints to replace the 
     wooden barrel staves then used to set broken bones.
       The company he created thrived and exists today as DePuy 
     Inc., a unit of Johnson & Johnson. It eventually spawned 
     other companies, as people left to start competing 
     operations. Indeed, Warsaw's largest employer is Zimmer 
     Holdings Inc., founded by a DePuy salesman who broke out on 
     his own in the 1920s. Today, about 60% of the workers who 
     live within seven miles of Warsaw are directly or indirectly 
     engaged in orthopedics manufacturing, says Joy McCarthy-
     Sessing, president of the local chamber of commerce.
       Such a concentration of one industry in such a small town 
     is unusual, but the larger phenomenon isn't unusual at all. 
     Many of the strongest U.S. manufacturers set up production 
     far away from urban centers, with their high taxes, labor, 
     and utility costs, and instead look for locations in small 
     towns, close to major highways and railways. Proximity to 
     transportation hubs allows for smooth logistics in an age of 
     just-in-time deliveries. Warsaw, for instance, sits astride a 
     highway, U.S. 30, connecting Fort Wayne and Chicago.
       Economists have long known that businesses thrive when they 
     congregate in one place. Think of Hollywood movie studios, or 
     the Route 128 technology ring around Boston. The same holds 
     true in manufacturing. ``Companies that operate in clusters 
     have greater access to talent,'' explains Jeffrey Grogan, 
     partner at the Monitor Group, a Boston strategy consulting 
     firm. They also serve as fertile ground for start-ups.
       Mr. Running's company, Deo Volente Orthopaedics LLC, is a 
     prime example. Mr. Running first met his partners, Rod Mayer 
     and Jeff Ondrla, when the three were working together at 
     DePuy in the early 1990s. Mr. Running and Mr. Ondrla are 
     engineers and inventors, and Mr. Mayer's background is in 
     sales.
       Mr. Mayer got the idea for the company after seeing that 
     the market for ``extremity'' devices, such as plates and 
     screws for fixing broken wrists, wasn't then as developed as 
     it was for major joints, such as hips and knees. The three 
     were eager to get away from big-company bureaucracy.
       And as often happens in the close confines of Warsaw, the 
     partners' connections stretch into their personal lives: They 
     were attending the same evangelical church in 2004 when they 
     launched the company. Deo Volente means ``God willing'' in 
     Latin.
       The three men agree it is a hefty advantage to have so much 
     of what they need at their fingertips. ``It's a lot easier to 
     drive across town and visit a supplier then it is to pick up 
     the phone and try to talk through some complicated issue,'' 
     says Mr. Ondrla.
       Warsaw is dotted with small support businesses, from 
     packaging firms that specialize in super-clean processes to 
     machine shops. There are even multiple manufacturers of the 
     plastic trays and cases needed to pack orthopedic kits. A 
     total hip replacement, for instance, can require up to 22 
     cases of equipment and each case and tray is specially 
     designed.
       The region surrounding Warsaw has long been home to the 
     U.S. automotive and machinery industries, churning out a 
     stream of skilled machinists, toolmakers and industrial 
     engineers. Orthopedics makers opening up shop in Warsaw found 
     a ready supply of skilled workers, particularly in recent 
     years as the more-traditional sectors have slumped.
       Whole companies in the region have switched over to serving 
     the orthopedics industry in recent years, including the small 
     factory contracted to do most of the production for Deo 
     Volente: Three years ago, Micropulse Inc., of nearby Columbia 
     City, Ind., stopped doing any work for the automotive and 
     other old-line industries--which once accounted for over half 
     of its business--to focus on orthopedics.
       ``Half of our customers were closing, so we divorced them 
     all,'' says Brian Emerick, president of Micropulse. His 
     company is now growing 25% a year, he says.

  Mr. SOUDER. In 1895, in this small town--which at that point was a 
lot smaller--a man named Revra DePuy founded DePuy Manufacturing in 
Warsaw. The problem back then was that they were using wooden barrel 
stays to do hips. So he thought a fiber splint would be better. So 
DePuy went on--and now is part of Johnson & Johnson--to become a major 
player there. In 1926, Justin Zimmer, a sales manager for DePuy, felt 
that he had a better idea for different types of splints, and he broke 
off and developed Zimmer Manufacturing, now based in Warsaw. In 1997, 
Dr. Dane Miller and a small group of innovators and entrepreneurs 
formed Biomet in Warsaw.
  Today these three companies are headquartered in Warsaw, Indiana, and 
are three of the five biggest orthopedic companies in the entire world. 
Zimmer, for example, employs 8,300 people and has $33.9 billion in 
sales in 100 countries around the world. In addition in Warsaw, other 
companies have come up--a division of Medtronic that does spinal 
research and production; Orthopediatrics specializes in anatomically 
appropriate, unique instrumentation and biologics for pediatric and 
small-stature patients because they're going to take different sized 
elbows, shoulders and knees.
  In addition, we have many tier one and tier two suppliers who are 
centered in this region--Paragon Medical, Micropulse and Symmetry are 
tier one suppliers to the orthopedic industry. C&A Tool, one of the 
remaining large-sized machine tool manufacturers in America, makes 
highly detailed parts that go into your body, takes tremendous 
precision, as they also do for NASA and for defense contractors because 
they've managed to survive by upgrading and putting in million-dollar 
equipment.
  Now Warsaw and Kosciusko County, along with the State of Indiana and 
the Lily Foundation, are proposing to develop a BioCrossroads project. 
This is the type of cluster that we need in America. We can't all be 
hamburger flippers. We can't all work in retail stores. You have to 
have R&D centers and clusters that you fight as a community, as a State 
and as a Nation to protect, just like other countries fight to protect 
those. Now the reason that all of a sudden this has become relevant is 
that last week, a health care proposal was floated in the other body 
that proposes to tax medical device companies 10 to 30 percent. I would 
like to insert into the Record from The Wall Street Journal ``The 
Innovation Tax'' editorial.

             [From the Wall Street Journal, Sept. 8, 2009.]

 The Innovation Tax--How Max Baucus Knifed the Medical Devices Industry

       Supposedly the Senate's version of ObamaCare was written by 
     Finance Chairman Max Baucus, but we're beginning to wonder if 
     the true authors were Abbott and Costello. The vaudeville 
     logic of the plan is that Congress will tax health care to 
     subsidize people to buy health care that new taxes and 
     regulation make more expensive.
       Look no further than the $40 billion ``fee'' that Mr. 
     Baucus wants to impose on medical devices and diagnostic 
     equipment. Device manufacturers would pay $4 billion a year 
     in excise taxes, divvied up among them based on U.S. sales. 
     This translates to an annual income tax surcharge anywhere 
     from 10% to 30%, depending on the corporation.
       Why $40 billion? No reason in particular, except that Mr. 
     Baucus needs to finance nearly $900 billion in new spending 
     and so he'll grab anything within arm's reach. While there 
     are some exemptions, such as tongue depressors and 
     eyeglasses, most of the devices tax will fall on hundreds of 
     thousands of products that are basic components of modern 
     medicine. Some are routine--surgical equipment, diabetes 
     testing supplies--while others are cutting-edge technologies, 
     like replacement joints, pacemakers, stents, and MRI and CT 
     scanners.
       This new tax will eventually be passed through to patients, 
     increasing health-care costs. It will also harm innovation, 
     taking a big bite out of the research and development that 
     leads to medical advancements. The core of the industry 
     (excluding a few conglomerates like Johnson & Johnson) spent 
     about $9.6 billion on product development in 2007, according 
     to Ernst and Young. The Baucus tax is nearly half that, and 
     also exceeds $3.7 billion, the total venture capital invested 
     in device makers that same year.
       Even if consumers will ultimately pay one way or another, 
     this tax also offers an instructive lesson in the perils of 
     industry dealmaking in President Obama's Washington. 
     Convinced by the White House that legislation was inevitable, 
     most of the health-care lobbies decided to negotiate and

[[Page H9780]]

     pay ransoms so Democrats would spare their industries greater 
     harm. Sure enough, the device maker lobby, AdvaMed, was among 
     the ``stakeholders'' that joined with Mr. Obama in a Rose 
     Garden ceremony in May and pledged to ``save'' $2 trillion 
     over 10 years to fund his program.
       AdvaMed was nothing if not a team player. It endorsed 
     Democratic inspirations like comparative-effectiveness 
     research and value-based purchasing, despite the danger that 
     under such centralized decision-making the government will 
     decide that the most effective and valuable treatments also 
     happen to be the cheapest--rather than those that are best 
     for patients. It also suggested a variety of other taxes that 
     would have resulted in a lower bottom line, much as Big 
     Pharma promised $80 billion in drug discounts and the 
     American Hospital Association agreed to $155 billion in 
     Medicare and Medicaid reimbursement cuts.
       But the word on Capitol Hill is that AdvaMed's tribute 
     wasn't handsome enough for Mr. Baucus's tastes. The massive 
     new tax--which wasn't a part of any of his policy blueprints 
     released earlier this year--is in part retaliation. Partly, 
     too, the device makers simply don't have the same political 
     clout as the other big players, making them an easier mark. 
     Old Washington hands are saying the device lobby made a 
     ``strategic mistake'' by not offering Mr. Baucus more 
     protection money, but the real mistake was trying to buy into 
     the ObamaCare process, instead of trying to defeat its worst 
     ideas outright.
       And now it may be too late. As we've argued, liberal 
     Democrats think that merely allowing an industry to continue 
     to exist is a concession, and they're already taking the 
     pharma and hospital concessions and running them higher. In 
     the case of devices, patients will be left with higher costs 
     for fewer life-saving technologies.

  Mr. SOUDER. This proposed provision would tax these companies 10 to 
30 percent. Medical devices are currently paid for by hospitals. You 
don't declare that individually in Medicare or in any other health--it 
goes through a hospital. The hospitals have already been asked to lower 
their costs and put money into the system. So this would be a direct 
tax based on the sales and profits of these companies.
  Now there are three classes of medical devices. The joke that 
occurred around this was, in class one, Q-tips are called a medical 
device. Well, we heard today that Q-tips are going to be exempt, as are 
condoms, as are home pregnancy tests, as are scented Maxi Pads. So I 
guess that's the good news. The bad news is that what isn't exempt is 
class two and class three, which are going to have huge taxes on these 
companies and will restrict innovation. What are they? Heart valves, 
automatic cardiac defibrillators, heart imaging machines, insulin 
pumps, hearing aids, electric wheelchairs, and of course, all 
orthopedic joints--spine and neck implants included with that. They are 
going to be taxed.
  What in the world is going on here? I think that a lot of people are 
of the impression that this kind of stuff just comes, that somehow it 
magically appears. In fact, I've heard people say, Well, why don't we 
all just get on Medicare? Besides the fact that Medicare is broke, 
Medicare hasn't invented anything for hips. They only cover variable 
costs. No research comes out of Medicare. No research comes out of 
Medicaid. No research comes out of the Veterans Administration. All 
that's funded by private pay. All that's funded by profits of 
corporations.
  And if you take away the profits, they aren't going to be developing 
special hips for 18-year-old soldiers who are shot up. They now have 
body armor, but they are getting shot in their joints and now have to 
live for the rest of their lives with that. They aren't going to do it 
for the little kids. As people live longer and have this in their 
bodies longer, they aren't going to do all the variations. They aren't 
going to be able to do custom orders. R&D will tend to be shot. It may 
move offshore. It may totally disappear. This tax would be a disaster 
to America, and I hope it can be defeated.

                          ____________________