[Congressional Record Volume 155, Number 148 (Wednesday, October 14, 2009)]
[House]
[Pages H11360-H11362]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              IMPORTANCE OF INDUSTRY CLUSTERS TO A NATION

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Indiana (Mr. Souder) is recognized for 5 minutes.
  Mr. SOUDER. Mr. Speaker, I'm going to make a number of comments here 
that will be in the Record tomorrow. We'll also have the things I refer 
to--because I'm going to make a number of points--on our Web site in 
the next hour.
  President Obama made his first visit after the stimulus package 
passed to Elkhart, Indiana, to Concord High School for a town hall 
meeting that straddles Congressman Donnelly's and my district. 
Unemployment was 15.3 percent when he visited. It went higher, up to 
close to 20 percent. It's now at 16.5, I believe. In other words, we've 
gone backwards.
  What he said that day--referring to a previous campaign visit there--
``I promised you back then that, if elected, I'd do everything I could 
to help this community recover and that's why I come back today because 
I intend to keep my promise.''
  Now, some interesting things have been happening. We've heard about 
blaming the banks. You know, business, to invest, has to have an idea 
that a recovery is coming. It has to request the money. And part of the 
challenge here if they're uncertain whether they're going to get taxed 
in a small business tax, if they're uncertain whether they are going to 
be taxed in health care, if they're uncertain of what the energy costs 
are going to be in Indiana--because ours are projected to get hit 
harder than any other congressional district in America, and I have the 
number one manufacturing district--they aren't asking to borrow and the 
banks don't know how to value the assets.
  We have to have a recovery, not taxes and pressures on industry. 
There's a classic book, ``Competitive Advantage of Nations'' by Michael 
Porter. He's written a lot of books since then, including one on health 
care I don't particularly agree with. But he's a very reflective man, 
and these are the basic principles of how you develop clusters.
  He says, ``Creating competitive advantage in sophisticated industries 
demands improvement and innovation--finding better ways to complete and 
exploiting them globally, and relentlessly upgrading the firm's 
products and processes.''
  In another section of the book he says, We ``must create new 
advantages at least as fast as competitors can replicate old ones.''
  He also points out the United Kingdom, in their R&D, is among the 
highest compared to GDP of any nations, but top heavy government R&D. 
They don't have the private sector R&D, so they don't have the growth, 
and the growth they have is in the wrong areas.
  Now, why do I bring this up? In a newsletter of ``ORTHOKNOW, 
Strategic Insights Into the Orthopedic Industry,'' John Engelhardt 
reports the 10 to 30 percent tax in the Senate Finance Committee's bill 
that was passed yesterday would lead to roughly a tax of 50 percent of 
the R&D that the orthopedics industry does. For example, Zimmer--based 
in my district--in the orthopedics cluster, Zimmer would be taxed $94.7 
million and their R&D is $194 million. They're the biggest orthopedic 
company.
  Biomet--which I believe is the fourth or fifth biggest orthopedic 
company--would be taxed $60.9 million. R&D estimate for 2008 was 82.2, 
and they had a loss.
  Now, Michael Porter points out when you lose one or two, you lose 
that competitive pressure, that you cannot sustain R&D with the new 
taxes, especially if at the margins the cost of the tax is greater than 
the profits of the firm, let alone the R&D.
  I also refer to a USA Today article of this morning that says, 
``Orthopedic Industry Has Enjoyed Fine Health.'' And it goes to Warsaw, 
Indiana in my district where three of the five biggest of the 
orthopedic companies, plus Medtronic, plus Orthopediatric, plus 6,000 
direct feeding, plus as you move to South Bend and over to Fort Wayne 
and down to Indianapolis--and in fact throughout the Midwest--and then 
if you look at the whole industry of the United States, it's a cluster.
  We had this theory in America that we were going to move up the 
ladder. And as other countries beat us on labor, we would do things 
like pharmaceuticals, like orthopedics, like biotechnology. We'd be the 
cutting edge, except now we're going to tax them to death.
  So guess what this article says? They're looking at going overseas. 
I've already heard this. Why won't they go offshore if they can get 
cheaper labor? They can get engineering research, they can get 
government subsidies to some degree, but most importantly, they're 
going to go where they can do R&D and the combination cheaper than they 
can do it in the United States. A tax won't bring in revenue, a tax 
will drive our clusters away. To put the taxes on the most innovative 
clusters is unbelievable. I just don't understand, particularly in a 
State where the President said not 30 miles away from the center of the 
orthopedic industry where many of these parts people are, ``I promise 
you it will improve.''
  The maverick CEO, Dane Miller, and the story of Biomet illustrates 
another myth that these are some sort of rich billionaires. It talks 
how he put a titanium hip in his own body because initially they 
wouldn't believe it, then it worked, and that's partly how we got the 
innovation today.
  I encourage people to read this bio of Dane Miller.

                      [From Orthoknow, Oct. 2009]

                     Success Fees for Orthopaedics?

                        (By John A. Engelhardt)

       In the Senate Finance Committee's healthcare reform bill, 
     partial financing will come from ``fees'' imposed on the 
     manufacturers of medical devices. As I review what is being 
     proposed, I am (nearly) at a loss for words. The total cost 
     to medical device companies will be $40 billion over ten 
     years. That's $4 billion a year. Here is how it shakes down.
       The U.S. medical device industry in 2009 is projected to be 
     valued at $91.3 billion. Orthopaedic revenues generated in 
     the U.S. in 2008 reached $21.7 billion. Assuming flat growth 
     from 2008 to 2009, orthopaedics would then comprise 23.7% of 
     the total medical device industry in the U.S. in 2009.
       America's Healthy Future Act of 2009, ``Annual Fee on 
     Manufacturers and Importers of Medical Devices,'' would 
     impose an aggregate fee of $4 billion on the medical device 
     industry, payable annually, beginning in 2010. Each company's 
     fee would be calculated based on its relative market share of 
     U.S. sales for the prior year with covered domestic sales 
     taken into account as follows:
       0% of sales up to $5 million
       50% of sales over $5 million and up to $25 million
       100% of sales over $25 million
       According to our calculations, if orthopaedics represents 
     23.7% of the total medical device industry, then its portion 
     of

[[Page H11361]]

     the $4 billion would be $949 million. Exhibit 1 summarizes 
     the fees assessed for several companies.
       You will note that this is not being called a tax. Thus, it 
     is NOT deductible by these companies as a legitimate business 
     expense. Let me just repeat that for effect. It is NOT 
     deductible by these companies as a legitimate business 
     expense!
       The ``fee'' adds up to about four percent of orthopaedic 
     product sales for the companies. Since it is not deductible, 
     that automatically comes OFF the bottom line. The loss drops 
     right through the P&L. Here are some highlights.
       In the case of Exactech, it wipes out nearly 40% of its 
     earnings. The value of the company will decrease a pro rata 
     amount, losing $60 million in shareholder value.
       In 2008, Osteotech made a small profit of $2.2 million. 
     Under the Senate proposal, the company would pay $3MM in 
     fees! This is a company struggling back to health. How long 
     would they be able to remain a viable entity?
       Biomet, in the midst of a rebuilding and restructuring, 
     lost $749MM in 2008. Under the new plan, it would pay almost 
     $61MM. I am not making this up.
       Alphatec would have to pay about $3MM for the pleasure of 
     having lost about $25MM!
       Study Exhibit 1 carefully. You'll find yourselves asking 
     many questions. What planet are we on? Where did these 
     Senators go to school?
       Did they even go to school? Maybe they didn't have math in 
     their school.
       It is very hard to argue with the economics of orthopaedic 
     care. It has been positively documented for a half century.
       Many people describe joint replacement as among mankind's 
     most significant achievements, not only for the suffering it 
     relieves but for its economic value to society. Recently, 
     others have published the more compelling metrics of 
     orthopaedic treatment in response to the reform debates. (See 
     the ORTHOWORLD Position Paper on Healthcare Reform, 
     www.orthoworld.com/site/index.php/main/healthcare, and 
     Connections, the blog of Biomet CEO, Jeffrey 
     R. Binder, www.biomet.com/corporate/ceo
     Blog/.)
       It's as if, in their infinite wisdom, our representatives 
     have identified the achievers and propose to levy a cost on 
     them to help support the underachievers.
       These companies have done too well, helped too many people, 
     created too many good quality jobs. Shouldn't we be holding 
     them up as an example to others, in order to encourage 
     efficiency and reward performance?
       I can think of no other term for this than a penalty for 
     success. In essence, these companies will have to pay for the 
     right to do business in their own country.
       Forgive me if I am having trouble grasping the idea that if 
     you fail, the government gives you taxpayer's money to bail 
     you out. If you succeed, that same government fines you?
       I hope not to insult any of you reading this when I suggest 
     exactly what this will cause, because it is so obvious to us 
     thinking folks.
       1. Jobs will be lost. These companies are massive providers 
     of extremely high quality jobs. They will be forced to pare 
     down their workforces.
       2. Jobs will be moved overseas. In order to make up the 
     margin deficits, good corporate stewards will examine all 
     opportunities to drive costs down.
       3. R&D budgets will be reduced and innovation will slow.
       4. U.S. companies will focus on the markets outside the 
     States where the penalties don't apply. They'll get four more 
     cents on a dollar of sales if the sale is ex-U.S.
       5. The cost of healthcare will not budge.
       6. When the plan fails, the government will just come back 
     for more.
       What's next? Bonus points for product recalls?
       And so it goes. We take from the most successful, and give 
     to the least, until such time as a steady state of mediocrity 
     is reached. This goes way beyond everyone getting an award in 
     the T-Ball tournament.
       I will hereby propose a new Mediocrity Czar, whose job it 
     will be to ensure that all aspects of society are put on an 
     even playing field. Here are some suggestions.


                                 Sports

       LeBron James will be required to give every point over 20 
     per game to the other team.
       Michael Phelps will have to swim with a cinderblock tied to 
     his leg to allow all those who have never won a gold medal to 
     do so.
       Tiger Woods will be required to carry his own bag, and will 
     not be allowed to set it down during play.


                                Business

       Bill Gates and Steve Jobs will have a portion of their 
     brains removed until such time as those pesky competitors of 
     theirs catch up.


                                Politics

       No action needed.
       Perhaps there is more that orthopaedics can do to 
     contribute.
       All sales reps and distributors will have their commission 
     structures modified such that the more they sell, the less 
     they make. Those who sell more than $5MM per year will give a 
     portion of their commissions to those who didn't sell squat.
       Surgeon reimbursement will be inversely proportional to 
     surgical volume.
       If a surgeon is too talented and popular with patients, he/
     she will be required to strike that patient soundly with a 
     stick at the end of each office visit.
       This should help just about everyone rise to the middle.
       A generation ago, some of the people reading this article 
     and their forebears were called upon by mankind to help 
     eliminate the suffering of millions of people crippled by 
     arthritis, debilitated by back pain and homebound by 
     injuries.
       You responded with joint replacement, spinal fusion and 
     arthroplasty, arthroscopy and soft tissue repair and trauma 
     technologies, and the result was that these lost souls were 
     able to return to active lives as healthy contributors to 
     society.
       You are called upon again today, as we seek to find a way 
     to treat the millions of new orthopaedic patients stressing 
     the system. Only this time we're broke.
       So it looks as if we are being asked to pay for the right 
     to contribute further.
       Surely there is a better solution that will not undo a 
     century of progress in healing.
                                  ____


                       [From Kaiser Health News]

              Orthopedic Industry Has Enjoyed Fine Health

                           (By Julie Appleby)

       Warsaw, Ind.--Travis Funk, laid off a year ago from his job 
     finishing boat interiors, hopes to land a job in a field he 
     thinks has more promise: making artificial hips and knees for 
     an aging population.
       ``I figured the best thing to do was get into the 
     orthopedic industry,'' says Funk, 29, who is taking algebra, 
     blueprint reading and computer programming classes at Ivy 
     Tech Community College here several nights a week. He hopes 
     knowledge gained in the 12-month program will earn him a job 
     in Warsaw, a small town in a lake-dotted part of rural 
     Indiana known as the ``orthopedic manufacturing capital of 
     the world.''
       Zimmer Holdings, Biomet and DePuy Orthopaedics are based 
     here, along with several smaller companies and suppliers. 
     Together, they generate nearly a third of the estimated $32 
     billion in global orthopedic device sales.
       For much of the past decade, times have been good for the 
     industry, with hefty profits from steadily rising sales of 
     its artificial hips and knees, bone screws and other devices 
     worldwide. More than 700,000 hip and knee replacements are 
     performed in the U.S. each year. That number could double by 
     2016, driven partly by osteoarthritis and other ailments, 
     researchers told the American Academy of Orthopaedic 
     Surgeons' annual meeting last February.
       Yet, the industry, succeeding even as some other U.S. 
     manufacturing sectors are slumping, does face challenges:
       The recession has curbed demand for orthopedlc devices 
     worldwide as patients delay treatment, forcing layoffs at 
     some companies.
       A proposal that passed the Senate Finance Committee on 
     Tuesday would place up to $40 billion in new taxes on the 
     medical device industry in the next decade.
       Device makers say such a tax would stifle job growth and 
     innovation, adding to unemployment in regions such as Warsaw. 
     But the health overhaul proposals could also bring benefits 
     to the area, such as helping provide subsidies so unemployed 
     workers such as Funk could purchase health insurance.
       Senate Finance Committee Chairman, Max Baucus, D-Mont, who 
     proposed the tax, sees the levy as the device industry's fair 
     share in helping pay legislation that could bring it millions 
     of new insured customers.
       Orthopedic device industry profits are healthy: Zimmer 
     Holdings and Stryker Corp. show five-year average gross 
     profit margins of 76.5% and 68.3%, respectively, according to 
     Thomson Reuters. Medical equipment and suppliers as a whole 
     showed five-year gross margins of 59% compared with 45.8% for 
     the S&P 500.
       Drugmakers and hospitals have agreed to help finance part 
     of the legislation, expected to cost more than $800 billion 
     over a decade, according to a Congressional Budget Office 
     estimate.
       Drugmakers, for example, agreed to what they say is an $80 
     billion deal that includes cutting by half the prices they 
     charge patients who hit a coverage gap in the Medicare drug 
     program. Hospitals agreed to a $155 billion cut in Medicare 
     reimbursements over a decade.
       Jeffrey Binder, president and CEO of Biomet, says the 
     device industry faces a double whammy.
       ``This particular fee is completely out of proportion with 
     what any other sector has agreed to do,'' he says. ``It would 
     cost our company alone $45 million to $50 million a year. 
     That's equivalent of approximately 800 jobs.''
       In addition. device makers, who sell directly to hospitals, 
     will be under pressure to lower their prices as hospitals 
     attempt to absorb their own cuts related to the health care 
     overhaul, Binder says.


                             No guarantees

       The fate of the tax is uncertain. A number of Democrats and 
     Republicans oppose it.
       So, too, dogs the industry's trade group, the Advanced 
     Medical Technology Association (AdvaMed), which says the tax 
     would be passed on to consumers in higher prices--or result 
     in job cuts.
       The $4 billion-a-year tax on the $130 billion medical 
     device industry ``is a devastating prospect,'' particularly 
     for smaller companies, AdvaMed President and CEO Stephen

[[Page H11362]]

     Ubl said at a news briefing in Washington on Tuesday. The 
     industry is lobbying hard against the tax, but Ubl says it 
     supports other elements of the legislation, such as finding 
     new ways to compare which drugs, devices and treatments work 
     best.
       Senate Finance Committee staff, speaking to reporters 
     Monday, said the device tax is a flat amount based on each 
     company's market share, not product prices, a provision meant 
     to discourage passing the fee to consumers.
       The controversy about the device tax illustrates how 
     difficult it is for lawmakers to find ways to pay for their 
     ambitious health care ideas. For months, proposals have come 
     and gone--and come back again--from fees on soft drinks to 
     levies on the wealthy. A windfall-profits tax on health 
     insurers and an excise tax on expensive individual health 
     policies are under consideration. Device makers are just 
     taking their turn in the hot seat.
       ``Congress has a not-in-my-backyard problem in health 
     reform,'' says Robert Laszewski, an Alexandria, Va.-based 
     health policy consultant. ``Everyone wants it, but someone 
     else has to pay for it.''


                           Pluses and minuses

       The health care debate in Washington might seem a long way 
     from this community 2\1/2\ hours north of Indianapolis. But 
     the topic is top-of-mind for the executives who run the 
     device companies, the physicians who use the products 
     produced in the plants, and people seeking jobs in the 
     industry.
       Funk is among the growing number of uninsured in Warsaw and 
     its surrounding area. About 19% of people here have no health 
     insurance, compared with 15.4% nationally, according to the 
     most recent census data.
       For Funk, the proposed tax is ``a toss-up.'' If health 
     reform is approved, he would likely qualify for subsidies to 
     help him buy insurance. But the tax might make it more 
     difficult for him to find work in the industry.
       Today, device makers employ about 6,000 people in Kosciusko 
     County, accounting for nearly 19% of the county's private-
     sector jobs, according to a September report from 
     BioCrossroads, a group formed by venture capitalists and 
     philanthropic organizations to boost the life sciences 
     industry in Indiana.
       ``It's the only thing that provides a ray of sunshine in 
     that part of the state,'' says Robert Guell, professor 
     economics at Indiana State University.
       Jobs run the gamut, from Ph.D. chemists to machinists. 
     Workers at Biomet and the other plants use high-tech 
     computerized lathes to craft hips and knees from titanium. At 
     Zimmer, which has its own foundry workers in heat-protective 
     suits pull molten-hot molds of joints from giant furnaces, 
     Upstairs, scientists in nearly soundless offices research the 
     next advance in device technology.
       Medical device jobs in Kosciusko County pay well, averaging 
     more than $81,000 annually, according to BioCrossroads.
       For a time, experienced workers were often lured from one 
     company to another.
       There was so much movement,``you almost had to keep a 
     scorecard to know where your neighbor was working,'' says 
     Thomas Krizmanich, an orthopedic surgeon who lives and works 
     in Warsaw. He says he has to be careful not to offend 
     patients who work for one of the three big device makers by 
     implanting them with competitors' products.
       ``Every company would like you to use 100% of their 
     product,'' Krizmanich says. ``It can be difficult to make 
     three companies happy.''
       The sagging economy has slowed job hopping--and hiring--in 
     the past year. In August, unemployment in Kosciusko County, 
     which includes Warsaw, was 11.6%, vs. the national average of 
     9.7%, says database service Proximity. But that was far below 
     that of neighboring Elkhart, where the jobless rate is 16%, 
     in part due to a sharp downturn in the recreational-vehicle-
     building industry.


                           Leaving the area?

       The proposed tax on device makers is not the only issue 
     dampening future employment prospects here.
       Other countries are offering huge incentives lure device 
     makers overseas, where labor costs and other expenses may be 
     lower.
       Zimmer Holdings and Biomet already have manufacturing 
     plants in Europe and China. And while Biomet's Binder says 
     those plants mainly serve emerging markets, he acknowledges 
     that some lower-skill production jobs have moved overseas.
       It's unlikely that orthopedic device manufacturing will 
     leave the USA entirely because the high-tech skills are hard 
     to transfer, says Larry Davidson, director of the Center for 
     the Business of Life Sciences at Indiana University.
       ``What has been helpful for that industry and will continue 
     to provide jobs in the U.S. and Indiana is that it's harder 
     for that industry to separate the technology and product 
     development from the manufacturing,'' Davidson says.
       Others are not so sanguine.
       ``It's conceivable that (device makers) could move 
     everything eventually,'' says Nick Deeter, president and CEO 
     of OrthoPediatrics, a Warsaw-based firm that develops 
     orthopedic devices designed for children. He buys components 
     from manufacturers based in the USA and abroad. ``Machines do 
     all the work now. Someone starts them and stops them. Even 
     though it's a high-tech product, it doesn't take a skill.'' 
     Other states and countries have tried to get Deeter to move 
     his headquarters.
       ``I have a pile of business cards from companies in 
     Ireland,'' he says. ``Akron, Ohio, recently offered us a $3 
     million grant to move.'' But he stayed, with the help of $4.4 
     million in grants and other incentives from Indiana.
       The ongoing recession means job openings in the device 
     industry are fewer and attract many more applicants, says 
     Melissa Denton, workforce and economic development director 
     at Ivy Tech in Warsaw.
       Enrollment in Ivy Tech's advanced orthopedic manufacturing 
     skills training program has grown so fast, now at 400 
     students, that the school has had to move into larger 
     quarters twice since last year.
       Funk expects to complete his training soon, although he 
     might pursue a two-year degree: ``I just hope someone hires 
     me.''

                          ____________________