Q: Is it true that Lynch used hospital refuse for some of his special effects?
A: Oh yes.
The scene in question is when Henry and Mary are asleep in bed. Henry is woken up by the spastic movements of his wife and pulls several "foetuses" from her body.
The "foetuses" were actually human umbilical cords that Catherine Coulson obtained from a hospital.
Doreen Small: "I was under the bed to keep tension on the umbilicals - the ‘billy cords’ as Jack would call them. And Jack pulled, and we sort of missed, and one of them landed in his shoe. He got so grossed out that we had to stop filming for a couple of days."