In my district there is a wonderful little town of around 12,000 people called Warsaw, Indiana. It's in Kosciusko County, a county with 100 lakes, including our biggest natural lake in the State of Indiana and many other sizable lakes.…
In my district there is a wonderful little town of around 12,000 people called Warsaw, Indiana. It's in Kosciusko County, a county with 100 lakes, including our biggest natural lake in the State of Indiana and many other sizable lakes. Tippecanoe, Syracuse, Webster Lake, North Webster, Big and Little Chapman as well as many other lakes. At this point I would like to insert into the Record from The Wall Street Journal ``Sticks and Stones May Break Bones, but Warsaw, Indiana, Makes Replacements.''
[From the Wall Street Journal, Oct. 26, 2006]
Sticks and Stones May Break Bones, but Warsaw, Ind., Makes Replacements
(By Timothy Aeppel)
Warsaw, IN.--When Don Running and his two partners decided
to start up a company specializing in orthopedic plates and
screws to mend broken wrists two years ago, it was a given
that they would set up shop here.
Silicon Valley has computers. Detroit has cars. But in
orthopedic devices, the undisputed world capital is Warsaw, a
city of 12,500 with a silver-domed 19th-century courthouse
and pickups angled into the curb on Main Street.
Three of the world's five largest makers of artificial
joints and related surgical tools have their headquarters
here amid the lakes and fields of northeastern Indiana. The
local industry has grown so much that it's now a regional
force, with orthopedics companies popping up in nearby farm
towns and the suburbs of Fort Wayne, about 50 miles to the
east.
``How many orthopedic-implant engineers do you find walking
around most places?'' asks Mr. Running. ``Well around here,
you bump into them in the supermarket.''
Memphis, Tenn., and northern New Jersey are other industry
hotspots, but none rivals Warsaw for sheer concentration. And
while major orthopedics companies are looking overseas for
cheaper places to produce items such as basic bone screws and
metal plates, the U.S. retains a firm grip on the industry.
A big reason is that the U.S., with its population of fast-
aging baby boomers, injury-prone weekend athletes and
overweight people, is by far the world's biggest market for
artificial hips and knees. The U.S. represents an estimated
$14 billion of the annual spending in a global market of
$22.9 billion, according to Knowledge Enterprises Inc., a
Chagrin Falls, Ohio, market research firm.
The U.S. also effectively protects manufacturers in the
sector with strict regulations for devices that go inside the
human body. Rather than risk problems--and crippling
lawsuits--U.S. health-care providers buy their artificial
joints from companies they know, which generally means buying
American.
Profits are so good in the orthopedics industry that there
isn't much pressure on suppliers to shave costs by going to
low-cost
countries. ``The reason this business is in Warsaw and not
Mexico is because margins are 70% or better,'' says Ron
Clark, an orthopedic surgeon who founded his own company in
Fort Wayne, which is on the other side of the state from his
home in Valparaiso, in part so he could be closer to Warsaw.
Dr. Clark says savings from going abroad just aren't worth
it.
To be sure, the industry's dynamics may be starting to
change. Health-care providers are starting to push back
against the industry's steady price increases, raising
concerns among investors about whether profits for Warsaw
companies and others can keep up the brisk growth.
There are other shadows over Warsaw's future. The U.S.
Justice Department has opened two probes of orthopedics
makers in the past two years, including an antitrust
investigation in which Smith & Nephew PLC, of the U.K., has
confirmed that one of its independent sales representatives
tried to initiate an industry-pricing strategy in response to
a U.S. hospital's bid request. Other producers, including
those in Warsaw, have said they didn't respond to the
suggestion.
The big implant makers also received a separate batch of
subpoenas in early 2005 regarding an investigation of any
financial ties between them and surgeons who recommend their
products. Doctors work closely with device makers to develop
and refine artificial joints, and the companies have long
paid surgeons as consultants and designers.
At least for now, though, Warsaw's orthopedics businesses
continue to hum. The industry got its start here over a
century ago, when a Canadian pharmacist, Revra DePuy, came up
with the idea of making flexible splints to replace the
wooden barrel staves then used to set broken bones.
The company he created thrived and exists today as DePuy
Inc., a unit of Johnson & Johnson. It eventually spawned
other companies, as people left to start competing
operations. Indeed, Warsaw's largest employer is Zimmer
Holdings Inc., founded by a DePuy salesman who broke out on
his own in the 1920s. Today, about 60% of the workers who
live within seven miles of Warsaw are directly or indirectly
engaged in orthopedics manufacturing, says Joy McCarthy-
Sessing, president of the local chamber of commerce.
Such a concentration of one industry in such a small town
is unusual, but the larger phenomenon isn't unusual at all.
Many of the strongest U.S. manufacturers set up production
far away from urban centers, with their high taxes, labor,
and utility costs, and instead look for locations in small
towns, close to major highways and railways. Proximity to
transportation hubs allows for smooth logistics in an age of
just-in-time deliveries. Warsaw, for instance, sits astride a
highway, U.S. 30, connecting Fort Wayne and Chicago.
Economists have long known that businesses thrive when they
congregate in one place. Think of Hollywood movie studios, or
the Route 128 technology ring around Boston. The same holds
true in manufacturing. ``Companies that operate in clusters
have greater access to talent,'' explains Jeffrey Grogan,
partner at the Monitor Group, a Boston strategy consulting
firm. They also serve as fertile ground for start-ups.
Mr. Running's company, Deo Volente Orthopaedics LLC, is a
prime example. Mr. Running first met his partners, Rod Mayer
and Jeff Ondrla, when the three were working together at
DePuy in the early 1990s. Mr. Running and Mr. Ondrla are
engineers and inventors, and Mr. Mayer's background is in
sales.
Mr. Mayer got the idea for the company after seeing that
the market for ``extremity'' devices, such as plates and
screws for fixing broken wrists, wasn't then as developed as
it was for major joints, such as hips and knees. The three
were eager to get away from big-company bureaucracy.
And as often happens in the close confines of Warsaw, the
partners' connections stretch into their personal lives: They
were attending the same evangelical church in 2004 when they
launched the company. Deo Volente means ``God willing'' in
Latin.
The three men agree it is a hefty advantage to have so much
of what they need at their fingertips. ``It's a lot easier to
drive across town and visit a supplier then it is to pick up
the phone and try to talk through some complicated issue,''
says Mr. Ondrla.
Warsaw is dotted with small support businesses, from
packaging firms that specialize in super-clean processes to
machine shops. There are even multiple manufacturers of the
plastic trays and cases needed to pack orthopedic kits. A
total hip replacement, for instance, can require up to 22
cases of equipment and each case and tray is specially
designed.
The region surrounding Warsaw has long been home to the
U.S. automotive and machinery industries, churning out a
stream of skilled machinists, toolmakers and industrial
engineers. Orthopedics makers opening up shop in Warsaw found
a ready supply of skilled workers, particularly in recent
years as the more-traditional sectors have slumped.
Whole companies in the region have switched over to serving
the orthopedics industry in recent years, including the small
factory contracted to do most of the production for Deo
Volente: Three years ago, Micropulse Inc., of nearby Columbia
City, Ind., stopped doing any work for the automotive and
other old-line industries--which once accounted for over half
of its business--to focus on orthopedics.
``Half of our customers were closing, so we divorced them
all,'' says Brian Emerick, president of Micropulse. His
company is now growing 25% a year, he says.
In 1895, in this small town--which at that point was a lot smaller--a man named Revra DePuy founded DePuy Manufacturing in Warsaw. The problem back then was that they were using wooden barrel stays to do hips. So he thought a fiber splint would be better. So DePuy went on--and now is part of Johnson & Johnson--to become a major player there. In 1926, Justin Zimmer, a sales manager for DePuy, felt that he had a better idea for different types of splints, and he broke off and developed Zimmer Manufacturing, now based in Warsaw. In 1997, Dr. Dane Miller and a small group of innovators and entrepreneurs formed Biomet in Warsaw.
Today these three companies are headquartered in Warsaw, Indiana, and are three of the five biggest orthopedic companies in the entire world. Zimmer, for example, employs 8,300 people and has $33.9 billion in sales in 100 countries around the world. In addition in Warsaw, other companies have come up--a division of Medtronic that does spinal research and production; Orthopediatrics specializes in anatomically appropriate, unique instrumentation and biologics for pediatric and small-stature patients because they're going to take different sized elbows, shoulders and knees.
In addition, we have many tier one and tier two suppliers who are centered in this region--Paragon Medical, Micropulse and Symmetry are tier one suppliers to the orthopedic industry. C&A Tool, one of the remaining large-sized machine tool manufacturers in America, makes highly detailed parts that go into your body, takes tremendous precision, as they also do for NASA and for defense contractors because they've managed to survive by upgrading and putting in million-dollar equipment.
Now Warsaw and Kosciusko County, along with the State of Indiana and the Lily Foundation, are proposing to develop a BioCrossroads project. This is the type of cluster that we need in America. We can't all be hamburger flippers. We can't all work in retail stores. You have to have R&D centers and clusters that you fight as a community, as a State and as a Nation to protect, just like other countries fight to protect those. Now the reason that all of a sudden this has become relevant is that last week, a health care proposal was floated in the other body that proposes to tax medical device companies 10 to 30 percent. I would like to insert into the Record from The Wall Street Journal ``The Innovation Tax'' editorial.
[From the Wall Street Journal, Sept. 8, 2009.]
The Innovation Tax--How Max Baucus Knifed the Medical Devices Industry
Supposedly the Senate's version of ObamaCare was written by
Finance Chairman Max Baucus, but we're beginning to wonder if
the true authors were Abbott and Costello. The vaudeville
logic of the plan is that Congress will tax health care to
subsidize people to buy health care that new taxes and
regulation make more expensive.
Look no further than the $40 billion ``fee'' that Mr.
Baucus wants to impose on medical devices and diagnostic
equipment. Device manufacturers would pay $4 billion a year
in excise taxes, divvied up among them based on U.S. sales.
This translates to an annual income tax surcharge anywhere
from 10% to 30%, depending on the corporation.
Why $40 billion? No reason in particular, except that Mr.
Baucus needs to finance nearly $900 billion in new spending
and so he'll grab anything within arm's reach. While there
are some exemptions, such as tongue depressors and
eyeglasses, most of the devices tax will fall on hundreds of
thousands of products that are basic components of modern
medicine. Some are routine--surgical equipment, diabetes
testing supplies--while others are cutting-edge technologies,
like replacement joints, pacemakers, stents, and MRI and CT
scanners.
This new tax will eventually be passed through to patients,
increasing health-care costs. It will also harm innovation,
taking a big bite out of the research and development that
leads to medical advancements. The core of the industry
(excluding a few conglomerates like Johnson & Johnson) spent
about $9.6 billion on product development in 2007, according
to Ernst and Young. The Baucus tax is nearly half that, and
also exceeds $3.7 billion, the total venture capital invested
in device makers that same year.
Even if consumers will ultimately pay one way or another,
this tax also offers an instructive lesson in the perils of
industry dealmaking in President Obama's Washington.
Convinced by the White House that legislation was inevitable,
most of the health-care lobbies decided to negotiate and
pay ransoms so Democrats would spare their industries greater
harm. Sure enough, the device maker lobby, AdvaMed, was among
the ``stakeholders'' that joined with Mr. Obama in a Rose
Garden ceremony in May and pledged to ``save'' $2 trillion
over 10 years to fund his program.
AdvaMed was nothing if not a team player. It endorsed
Democratic inspirations like comparative-effectiveness
research and value-based purchasing, despite the danger that
under such centralized decision-making the government will
decide that the most effective and valuable treatments also
happen to be the cheapest--rather than those that are best
for patients. It also suggested a variety of other taxes that
would have resulted in a lower bottom line, much as Big
Pharma promised $80 billion in drug discounts and the
American Hospital Association agreed to $155 billion in
Medicare and Medicaid reimbursement cuts.
But the word on Capitol Hill is that AdvaMed's tribute
wasn't handsome enough for Mr. Baucus's tastes. The massive
new tax--which wasn't a part of any of his policy blueprints
released earlier this year--is in part retaliation. Partly,
too, the device makers simply don't have the same political
clout as the other big players, making them an easier mark.
Old Washington hands are saying the device lobby made a
``strategic mistake'' by not offering Mr. Baucus more
protection money, but the real mistake was trying to buy into
the ObamaCare process, instead of trying to defeat its worst
ideas outright.
And now it may be too late. As we've argued, liberal
Democrats think that merely allowing an industry to continue
to exist is a concession, and they're already taking the
pharma and hospital concessions and running them higher. In
the case of devices, patients will be left with higher costs
for fewer life-saving technologies.
This proposed provision would tax these companies 10 to 30 percent. Medical devices are currently paid for by hospitals. You don't declare that individually in Medicare or in any other health--it goes through a hospital. The hospitals have already been asked to lower their costs and put money into the system. So this would be a direct tax based on the sales and profits of these companies.
Now there are three classes of medical devices. The joke that occurred around this was, in class one, Q-tips are called a medical device. Well, we heard today that Q-tips are going to be exempt, as are condoms, as are home pregnancy tests, as are scented Maxi Pads. So I guess that's the good news. The bad news is that what isn't exempt is class two and class three, which are going to have huge taxes on these companies and will restrict innovation. What are they? Heart valves, automatic cardiac defibrillators, heart imaging machines, insulin pumps, hearing aids, electric wheelchairs, and of course, all orthopedic joints--spine and neck implants included with that. They are going to be taxed.
What in the world is going on here? I think that a lot of people are of the impression that this kind of stuff just comes, that somehow it magically appears. In fact, I've heard people say, Well, why don't we all just get on Medicare? Besides the fact that Medicare is broke, Medicare hasn't invented anything for hips. They only cover variable costs. No research comes out of Medicare. No research comes out of Medicaid. No research comes out of the Veterans Administration. All that's funded by private pay. All that's funded by profits of corporations.
And if you take away the profits, they aren't going to be developing special hips for 18-year-old soldiers who are shot up. They now have body armor, but they are getting shot in their joints and now have to live for the rest of their lives with that. They aren't going to do it for the little kids. As people live longer and have this in their bodies longer, they aren't going to do all the variations. They aren't going to be able to do custom orders. R&D will tend to be shot. It may move offshore. It may totally disappear. This tax would be a disaster to America, and I hope it can be defeated.