- The Washington Times - Tuesday, September 29, 2009

Senate Finance Committee Chairman Max Baucus, Montana Democrat, made it clear last week that he has no plans to tax Q-tips, Band-Aids and toothbrushes. Such an announcement is a Washington cliche - literally true but functionally false. A $4 billion annual “fee” that Mr. Baucus has proposed on manufacturers of “medical devices” is still a $4 billion fee, and its costs still will be passed on to consumers. Even if those same consumers won’t see a direct price increase on their basic store-bought thermometers, their temperatures should rise when they realize that innovative technology is being strangled in the crib by punitive fees the industry can’t afford.

As part of his health care “reform” package, the chairman proposes that the $4 billion annual fee be apportioned “on any person that manufactures or imports medical devices offered for sale in the United States,” based on the previous year’s “relative market share.” After complaints that Q-tips and toothbrushes shouldn’t be taxed, Mr. Baucus exempted a whole class of devices that retail for under $100 from the fee calculation. That just focuses the burden on manufacturers of hearing aids and contact lenses, of heart rate monitors and the more sophisticated glucose meters for diabetes testing, of artificial hips and pacemakers.

Industry analysts claim the fee would amount to an effective added tax rate of roughly 3 percent, assessed not on profits but on much larger revenues. Plenty of small- and midsized manufacturers earn decent revenues but with small profit margins, meaning the fee could easily wipe out those profits, and put companies in the red.

It’s not as if the medical device companies have been gaming the system for huge profits. While most health care costs have been rising at about twice the rate of inflation, the costs of devices and diagnostics have risen at just half the overall inflation rate, or one-fourth the rate of health costs as a whole. The fee punishes an industry for doing exactly what Mr. Baucus says he wants - keeping costs low even as the industry continues to innovate.

Patients will clearly be harmed by this fee if it starts to choke off that innovation. Consider that the industry says it now spends about $9.6 billion per year on research and development. The $4 billion annual fee would take away $2 of every $5 spent on R&D. How many of the next generation of pacemakers, or battery-powered wheelchairs, or heart stents, will go undeveloped and unproduced because of this ridiculous tax?

Meanwhile, Mr. Baucus still doesn’t leave Q-tip makers in high cotton. Another part of his bill would limit an already existing tax break - commonly known as Flexible Spending Accounts - that lets customers use pretax dollars to buy daily medical supplies. So whether you want to save on ear cleaners or on ankle braces, the chairman’s bill causes you pain either way. As devices to keep from adding to the federal debt, these proposals are indeed the proverbial cures that are worse than the disease.