Punishing health-care innovation - part 2 — VOICES for REASONVOICES for REASON

On Friday I discussed the life-serving benefits made possible by the thriving, but fragile, medical technology industry in the United States. Literally millions of lives have been bettered and extended by the products this industry has created, such as defibrillators and advanced surgical tools. For an idea of how amazing the technology in this field is, consider that Paralympian amputees are now argued to have an advantage over non-handicapped, Olympian athletes. It’s not a pipe dream that advances in this industry might one day soon be able to restore sight to the blind, or complex motion to the paralyzed.

Not a pipe dream, that is, unless any of the health-care reforms in Congress come to pass.

The Max Baucus legislation introduced by the Senate Finance Committee would fund the expansion of government health care in part by an imposing industry-wide $40 billion tax on all medical devices costing more than $100 (and a similar tax on insurers, drug manufacturers and medical labs). That would be ruinous to medical progress. At $4 billion per year, that exceeds what the medical technology industry received in venture capital funding in 2007 and represents nearly half of what the entire industry spent on research and development that same year.

To make matters worse, the tax is apportioned on device manufacturers not according to their profits, which would be bad enough, but according to their market share. This would be devastating to companies creating products with a large market share but small margins, such as businesses breaking ground in completely new areas of medicine. By the very nature of what the most innovative companies are doing—creating novel, never-before-imagined products—they have a large if not complete share of an undeveloped, and therefore still unprofitable, market. The tax would crush them. Would we be reaping the benefits of MRI machines and CT scanners today if the reward awaiting their inventors had been a massive tax hit?

But, as disastrous as they are, the deleterious effects of the Baucus tax could be dwarfed by changes to Medicare and increased government control over all Americans’ insurance policies.

Through Medicare the US government controls the health care of nearly every American over age 65. The Senate Finance Committee bill and legislation passed by the House of Representatives would each cut Medicare’s future budget by around $500 billion. If these cuts were done as a step toward phasing out the program, they’d be a small step in the right direction. (Medicare and its sister Medicaid are bankrupting the country.) But neither bill would reduce the scope of the program.

Medicare is already infamous for reimbursing doctors and hospitals at outrageously low rates, and these budget cuts will come home in the form of even smaller payments. Even if Medicare agreed to cover treatments that make use of a new device, an endorsement that is notoriously difficult to receive, such squat compensation would discourage medical providers from offering it. The uncertainty of a future market could kill investment, especially in products such as better artificial hips and pacemakers that are used primarily by the elderly. Innovation would slow to a crawl.

To the further detriment of medical progress, each of these bills would expand Medicaid, which reimburses medical providers at rates even lower than Medicare.

And the beating doesn’t end there. The House legislation requires every American to own a “qualified plan,” the benefits of which would be determined by government. Already at the mercy of the FDA, drug and device manufacturers would have to fight the whims of the “Federal Coordinating Council for Comparative Effectiveness Research” to receive “qualified” status for their products. A whole new set of Washington bureaucrats would become arbiters of a product’s merit, making even more irrelevant the judgment of doctors, patients, manufacturers and insurers. Expect fewer companies and less innovation.

Outside America, in the many lands of socialized medicine, a recurring horror story is that of a government’s denying its citizens lifesaving drugs or medical devices that are available in the United States. If America accepts this government takeover of its health-care system, the world will experience a far greater tragedy: those new drugs and devices will cease coming into existence.

Image: Jonas_in_China on Flickr