2nd UPDATE:Retail Health Products Exempt From Medical-Device Fee

Manufacturers of low-end retail medical devices will get a break on industrywide fees, in the latest version of Senate health-care overhaul legislation unveiled Tuesday by Senate Finance Committee Chairman Max Baucus, D-Mont.

Baucus has proposed taxes on medical-device manufacturers of $4 billion annually, apportioned by market share, to help pay for expanded health-insurance coverage and other parts of the legislation.

But certain devices sold at retail for less than $100 - including hearing aids, tampons, contact lenses, and glucose and blood-pressure monitors - wouldn't be counted in calculating the tax, according to the revised version of Baucus' proposal.

That carve-out stands to lessen the burden of the tax on companies including CVS Caremark Corp. (CVS), Wal-Mart Stores Inc., (WMT), Johnson and Johnson (JNJ), and Medco Health Solutions Inc. (MHS).

"No consumer will be paying more for Q-Tips, Band-Aids and other consumer products when walking into a pharmacy or supermarket under our policy," a Senate Finance Committee aide said. "The fee appropriately targets manufacturers of more complex, nonretail medical devices and their total revenues."

The medical device industry is balking at the changes, saying they just shift the burden of paying the $4 billion in annual fees onto more expensive products.

"It is literally going to penalize patients that need the more sophisticated technology," said Wanda Moebius, a spokeswoman for AdvaMed, the main lobby for the medical-device industry. People in the industry have begun referring to the fee as an "innovation tax" because more expensive products will be taxed.

Moebius said it is too complex to tell how the fees will work because some devices are sold at a variety of prices. Hearing aides, for instance, can be bought for less than $100, meaning they won't be taxed, while some are more complex and provide patients with better hearing abilities and can cost $1,000, meaning they'll be taxed.

The initial version of Baucus' health-care plan, unveiled last week, already exempted from the tax Class I medical devices including tongue depressors, bedpans, and hand-held surgical and dental instruments.

The change announced by Baucus on Tuesday also carves out Class II medical devices sold at retail for up to $100 a unit.

Also Tuesday, five Republican governors asked Baucus to drop the fees on medical device makers altogether, arguing that the tax will cost jobs in their states. They said the $4 billion annual industry tax would result in an additional surtax of 3.1%.

"Such a rate would dramatically increase the overall effective tax rate on manufacturers, making the United States the highest tax jurisdiction in the world in which to produce medical technology," wrote Govs. Tim Pawlenty of Minnesota, Mitch Daniels of Indiana, Jim Gibbons of Nevada, Arnold Schwarzenegger of California and Gary R. Herbert of Utah.

The industry fees are part of a package intended to keep the bill from adding to the U.S. budget deficit. Similar fees will also apply to health insurers and pharmaceutical manufacturers.

The Finance Committee kicked off formal consideration of the Baucus bill Tuesday, with a committee vote possible by the end of the week.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; [e-mail]

(Alicia Mundy of The Wall Street Journal contributed to this article.)