APTOPIX Health Care Overhaul
Susan Walsh  /  AP
Senate Finance Committee Chairman Sen. Max Baucus, D-Mont., right, talks with committee member Sen. Jay Rockefeller, D-W.Va., on Capitol Hill on Tuesday.
updated 9/22/2009 5:38:22 PM ET 2009-09-22T21:38:22

They were calling it the tax on Q-tips.

Amid Republican ridicule, a Democratic chairman backed down Tuesday and exempted consumer items of $100 or less — from condoms to contact lenses — from a proposed tax on medical device manufacturers. It would help pay for health care coverage for the uninsured in comprehensive legislation.

But Finance Committee Chairman Max Baucus, D-Mont., left intact a $4 billion-a-year levy on the medical devices industry — keeping the controversy alive. The industry makes everything from heart valves to imaging machines to tongue depressors, and the Congressional Budget Office said Tuesday such industry fees could eventually raise insurance premiums by roughly 1 percent.

Baucus' last-minute switch came as his committee considers sweeping legislation to remake the health care system. It means that contact lens solution, scented maxi-pads and home pregnancy tests — among many other items — will not be taxed. (It's not clear if Q-tips were ever on his list.)

But more expensive consumer medical goods, from power wheelchairs to insulin pumps and hearing aids, would still get hit.

The difference is those are paid mostly through insurance, so the full cost doesn't come out of the household budget.

"He's trying to avoid the perception that the middle class is going to be taxed," said Dan Mendelson, president of Avalere Health, an information company that serves the health industry and government. "The trick is to get funding for the bill but not to have anything that smacks of a middle-class tax."

Costs passed on?
The medical devices industry says the taxes will get passed on to consumers. Republicans say that amounts to a violation of President Barack Obama's campaign pledge not to raise taxes on the middle class.

A top industry lobbyist said the tax will increase health care costs.

"One of the principal goals of health reform is to bend the cost curve, but there's no question that a significant portion of the tax is going to get passed on to consumers or providers of health care," said Brett Loper, representing AdvaMed, an industry trade group. "Ultimately that means higher premiums or copays."

The companies say they can't just take a $4 billion hit and suck it in.

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Loper cited a UBS Investment Research study that estimated the tax equals about one-fifth of industry profits. And the levy would take effect right away, before the coverage expansion in the Baucus bill gets going in 2013. That means the companies would start paying before they get the benefit of millions of new government-subsidized customers.

Scott Mulhauser, a spokesman for Baucus, said it's only fair. Hospitals and drugmakers have volunteered to take cuts to help pay for the overhaul — and so should device companies.

"Revenues to the device manufacturing industry will go up as insurance coverage expands, and this fee will ensure the industry helps contribute to the reform effort as it benefits," Mulhauser said.

'Q-tips tax' a misnomer
Supporters and detractors were equally surprised when Baucus' seemingly arcane proposal to impose a "fee" on the medical devices industry turned out to have such potentially broad consequences. The tax would be levied on the companies themselves, not directly on their products.

The government classifies medical devices into three types, from Class 1 to Class 3. Class 1 includes items like Band-Aids and Q-tips. Class 3 is for high-tech, high-risk devices, such as automatic cardiac defibrillators implanted in the body. Early sketchy versions of the Baucus plan made it sound like the companies would be taxed on revenues from all medical devices, giving rise to speculation about a Q-tip tax.

Last week, when Baucus formally unveiled his plan, he exempted Class 1 devices.

But critics kept talking about the Q-tips tax.

"This bill has new taxes on everything from Q-tips to pacemakers, and cancer screening to pregnancy tests," Sen. Charles Grassley, R-Iowa, said Tuesday morning, before Baucus announced his latest changes. "Experts and economists say that all of these health care taxes would be passed on to consumers."

His office said later that Grassley wasn't referring to the devices tax, but to another Baucus provision limiting a tax break now on the books that allows consumers to buy Q-tips and other medical goods and services with pretax dollars.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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