Rick Haury

Staff Photo by Angela Lewis Randy Bonner works at Fillauer Inc. on an artificial limb for a patient who has an amputation below the knee. A proposed tax on the medical device industry would affect companies like Fillauer.

In Tennessee and Georgia, manufacturers and vendors of medical devices such as wheelchairs, heart stents and prosthetic legs are objecting to a proposed tax on the industry.

"I think that any tax on medical devices is a bad idea, whether it's $20 billion or $20," said David Proctor, product manager at Accellent in Trenton, Ga. The company makes medical devices such as heart catheterization systems and hip joints.

As originally proposed in the U.S. Senate Finance Committee's health care reform bill, which passed earlier this month, a tax on the medical device makers, based on market share, would total $40 billion over 10 years.

Under pressure from the device-manufacturing lobby, the House health care bill introduced last week would cut the tax to $20 billion over 10 years, and the final Senate bill likely will include a $20 billion tax as well, The Associated Press reported.

Supporters of the tax argue that other industries -- from pharmaceutical companies to hospitals -- have agreed to commit billions to help pay for expanding health insurance coverage to most Americans, and so should device makers.

"Medical device manufacturers stand to benefit enormously from health insurance reform, and the Finance (committee) proposal asks them to contribute a reasonable portion of that benefit," said Scott Mulhauser, spokesman for Finance Committee Chairman Sen. Max Baucus, D-Mont., in an e-mail.

Under the Senate committee bill, "class I products" -- consumer products such as tongue depressors and cotton swabs -- and more complex "class II" retail products under $100, such as thermometers, would be exempt from the tax, as well as companies with less than $5 million in annual U.S. sales, according to Senate aides.

Those in the industry still argue that the tax will result in valuable jobs lost at device companies and cuts in funding for research of new products that could improve or save lives.

"That's probably where the impact would be felt the most -- it's going to stifle innovations," said Michael Fillauer, president of Fillauer Inc., the Chattanooga-based company that manufactures orthotic and prosthetic products. "Health care and medical devices in particular are a growing segment of the economy. Why do you target the successful part of the economy and penalize us, when there are plenty of other parts that are not growing?"

The tax also would affect equipment vendors who buy from manufacturers to sell to patients or to hospitals. If manufacturers raise their wholesale prices to offset the tax, vendors will be unable to pass on their rising costs to customers, because their payment rates largely are set by insurance companies or government payers, said Joel Holland, founder of Nashville-based Holland Medical, which provides products such as walkers, power wheelchairs and oxygen tanks and has a branch in Chattanooga.

With already low reimbursements, an increase in wholesale prices could sink some companies, Mr. Holland said.

"Home medical equipment companies are going out of business right and left," he said. "If our manufacturers have to go up on our prices, it's just going to put more and more of us out of business."

IN THE SOUTHEAST

The Southeast has lagged behind other regions in the medical device field, but in recent years a budding industry has emerged, said Rick Haury, founder of the Southeastern Medical Device Association, a trade group for the industry representing states that include Tennessee and Georgia.

The new tax could constrain further growth of the industry, he said.

"It's bad news in Georgia and Tennessee, as we're trying to catch up and develop a medical device industry along the lines of some of the other states," he said.

Some worry patients' access to home medical equipment will be constrained if more companies go out of business.

Tom Henley, owner of Henley Medical in Chattanooga, said his company likely won't stay open for another year because shrinking reimbursements have made it harder for him to make a profit on many of his sales.

The company carries power wheelchairs, custom seating and other ambulation products.

Home medical equipment "providers are quietly going away," he said. "The tax will makes things worse if it comes into play, but the truth of the matter is the lack of accessibility for people to get products ... is already in place."

Beverly Witt of the Orange Grove Center, a nonprofit organization in Chattanooga serving people with developmental disabilities, agreed that patient access is a concern.

"It is already affecting our ability to get (patients) the right equipment they need, especially customized rehabilitation equipment," said Ms. Witt, who helps get equipment for patients at Orange Grove. "Equipment vendors are giving us a lot of stuff at their cost because they get no profit on it. How much of that can you do and run a business?"

MEDICAL DEVICE INDUSTRY

Georgia

* Direct jobs: 6,801

* Payroll: $413 million

* Sales: $2.58 billion

Tennessee

* Direct jobs: 5,820

* Payroll: $323 million

* Sales: $2.07 billion

Source: Advanced Medical Technology Association

LEGISLATORS WEIGH IN

* "I am opposed to the tax increases proposed in the various health care reform bills. If Congress passes legislation that contains higher taxes for a specific industry, such as manufacturers of medical devices, it means anyone who needs these devices will pay higher prices." -- Sen. Johnny Isakson, R-Ga.

* "I will oppose any health care reform measure that will raise taxes." -- Sen. Saxby Chambliss, R-Ga.

* "It shouldn't come as a surprise that imposing higher taxes on those who deliver health care will raise health care costs." -- Sen. Bob Corker, R-Tenn.

* "The nonpartisan Congressional Budget Office has said these taxes on medical-device manufacturers and other taxes in the Baucus health care bill will likely be passed on to us in the form of higher premiums. The goal of health care reform should be to lower our premiums, not raise them." -- Sen. Lamar Alexander, R-Tenn.