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Artificial Joints, Real Controversy: Medical Tax Stirs Debate

By JEN WIECZNER

The many baby boomers considering hip or knee replacements in the coming years are likely to have to pay more to get them. The question is, How much more? And could the problems stretch beyond a higher price tag?

Under the Affordable Care Act, the Obama administration's signature health care reform law, medical-device manufacturers will pay a 2.3 percent tax on sales of such products starting in 2013. That tax will affect everything from surgical tools to oxygen tanks to wheelchairs. It is one of several features of the law designed to raise money to cover the uninsured -- it's expected to raise an additional $20 billion by 2019.

But experts say that the tax could have a particularly big impact in the world of knee and hip replacements. Such operations increased more than 26 percent to more than 1 million procedures in the U.S. between 2005 and 2010, according to the American Academy of Orthopaedic Surgeons; the total bill of the hospital stays for such surgeries was about $60.5 billion in 2010. And with the American population hitting retirement age in record numbers, demand is likely to surge: The number of knee replacement procedures alone is expected to increase 673 percent, to nearly 3.5 million, in 2030, according to a study presented at the annual meeting of the orthopedic academy.

At the simplest level, some critics of the tax estimate that the expense could add hundreds of dollars to the cost of each joint-replacement procedure, as the manufacturers of the joints pass the cost along to patients. "By having taxes that go into effect for health care companies, you're actually increasing the cost of health care in the country," says Dave Blaszczak, senior health policy analyst at the nonpartisan Potomac Research Group, which provides government and economic analysis to institutional investors.

Medical-device manufacturers contend, however, that the potential problems go much further. While the tax may seem relatively small -- it would amount to $230 on the sale of a $10,000 medical device -- opponents note that it hits sales, not just profits, which increases its impact. Indeed, several medical companies say that the surcharge would eat into their profitability, at the expense of their research and development budgets. Large orthopedic device maker Stryker says that in anticipation of the tax, it plans to cut more than $100 million from its annual pretax operating costs next year. Smaller device maker Zoll Medical says the new surcharge will raise its overall rate above 50 percent and use up its entire R&D budget.

If companies focus just on products that generate higher sales volumes, they may discontinue specialized models, leaving doctors and consumers with fewer options, says Julie Stralow, an orthopedics analyst at Morningstar. That could force doctors to be more hesitant before recommending joint-replacement surgeries and could also lead to higher prices, according to James Capretta, a fellow at the Ethics and Public Policy Center, a conservative-leaning organization that has opposed many elements of the Affordable Care Act.

No industry likes to face a tax increase, of course, and some advocates of the health-care act say that manufacturers are overstating its potential impact. Asked about the possible impact of the tax, the Treasury Department referred a SmartMoney reporter to a statement the White House released earlier this summer that said, "The medical device industry, like others, will benefit from an additional 30 million potential consumers who will gain health coverage under the Affordable Care Act starting in 2014. This excise tax is one of several designed so that industries that gain from the coverage expansion will help offset the cost of that expansion."

Other insiders are optimistic that scenarios like the ones the companies describe might not come to pass. "The manufacturers up until now have made a big profit on this, so there's some room to bargain," says Dr. Peter Mandell, chair of the American Academy of Orthopaedic Surgeons council on advocacy. "This market is never going to go away." Still, Mandell says, he and other surgeons are concerned about the possibility of a cutback in research; he cites, in particular, the danger that companies will fail to develop joint replacements for children and tumor patients, a generally unprofitable niche.

Ultimately, until the tax takes effect, its impact on consumers will remain unclear. But at least some remain unworried. Richard Warner, a 69-year-old marathon runner, created the Foundation for the Advancement in Research in Medicine, and its website BoneSmart.org, to educate consumers about the benefits of joint-replacement surgeries. Warner, a former insurance executive who has had both hips replaced, says he's confident that advances in efficiency -- such as improving robotic technology to assist surgeons and the advent of cheaper, disposable surgical instruments -- will soak up the extra costs. But even if they don't, he's willing to pay extra for the technology that took him from a wheelchair to finish lines across the country. "The physical pain prior to the surgery is so high, I'm not going to [worry about] a couple hundred dollars extra," says Warner. "I think it's worth it absolutely."