Lost in the furor of last week's debate concerning health care reform was a tiny clause tucked into Sen. Max Baucus' compromise proposal that could extract a huge tax from medical device makers.

When the news surfaced, the industry quickly went on the offensive -- contacting key lawmakers, issuing public statements and writing newspaper op-eds in protest.

Although scant on detail, Baucus' proposal calls for makers of pacemakers, artificial knees, heart valves and other medical devices to pay about $4 billion annually beginning next year, approximately 3 percent of annual U.S. sales. The fee, which would help fund the health care overhaul now emerging from the Montana Democrat's influential Senate Finance Committee, would be allocated by market share.

The device industry, a backbone of Minnesota's economy that employs about 50,000 people, claims that the measure could prevent small, cash-strapped companies from developing new products and could hamper research and development efforts launched by larger players. Several employers hinted that it could lead to job losses.

"I think it would have a negative effect on Minnesota's economy," said Stephen Ubl, the Mounds View native who heads AdvaMed, the medical technology industry's lobbying organization in Washington. "Minnesota would be disproportionately hit by this tax."

Minnesota is home to industry giants Medtronic Inc. and St. Jude Medical Inc., plus roughly 300 other device firms, according to LifeScience Alley, an industry organization. Other states that have strong concentrations of device makers include Massachusetts and California.

Under the most recent Baucus proposal, health insurers would be hit with a $6 billion annual fee, drugmakers, $2.3 billion, and clinical laboratories, $750 million.

Ubl argues that med-tech companies would be taxed twice "since a portion of the hundreds of billions in cuts aimed at our customers -- including hospitals, nursing homes and home health care agencies -- will be passed on to us." Such buyers might negotiate for lower prices or curb purchases altogether.

Boston Scientific Corp., which employs 5,000 people in the Twin Cities, called the Baucus tax proposal "misguided." It would "increase costs, choke innovation and almost certainly lead to job losses in Minnesota," spokesman Paul Donovan said.

Likewise, Medtronic spokesman Chuck Grothaus said the measure could "negatively impact our 8,000-member workforce in Minnesota."

One of the biggest concerns of AdvaMed and others is the effect they believe a tax would have on medical device start-ups -- companies that develop new technologies for patients from raw ideas.

Mark Knudson, CEO of Roseville-based EnteroMedics Inc., which is developing an obesity-fighting device, said he supports health care reform, but is concerned about proposals that "adversely affect innovation, which is the real engine of health care progress in United States."

Ubl rejected the notion that medical device makers can afford a tax, as they may see a windfall from health care legislation as more patients obtain insurance and enter the health care system. "Many of the individuals who are uninsured today tend to be younger, healthier -- and probably would not use many of our members' products, even if an expansion occurs," he said.

Ubl said news of the tax came down as the Baucus bill went through "various iterations and they found they were short about $100 billion or more." He said AdvaMed is busy contacting members of the Senate Finance Committee and key lawmakers to press its case. Among them: Minnesota Sens. Amy Klobuchar and Al Franken.

"I am concerned about the impact of the Finance Committee's proposed tax on jobs and research and development in our medical device industry," Klobuchar said. "As the bill moves through the Senate, I will work to improve it to ensure that Minnesota continues to be a leader in the medical technology industry."

Franken could not be reached for comment.

Morgan Stanley analyst David Lewis said in a note to investors this week that the Baucus proposal "is the beginning of a negotiation." He said that he doubts that AdvaMed would "posture" and risk "structural changes." But some concessions by the industry may be in order, he wrote. "If health care reform gains steam again, it is unlikely med-tech escapes unscathed."

Janet Moore • 612-673-7752