The health care legislation that was passed will hit medical device makers with a 2.3% excise tax on all medical devices, from bedpans to surgical instruments. Fox News reports that drug makers are also hit with fees estimated to yield $27 billion through 2019, according to the Joint Committee on Taxation. While these taxes and fees may very well raise revenue, it will seriously hurt medical innovation, an area where the US continually outperforms Europe. As Tyler Cowen points out in a NYT oped:
When it comes to medical innovation, the United States is the world leader. In the last 10 years, for instance, 12 Nobel Prizes in medicine have gone to American-born scientists working in the United States, 3 have gone to foreign-born scientists working in the United States, and just 7 have gone to researchers outside the country.
The six most important medical innovations of the last 25 years, according to a 2001 poll of physicians, were magnetic resonance imaging and computed tomography (CT scan); ACE inhibitors, used in the treatment of hypertension and congestive heart failure; balloon angioplasty; statins to lower cholesterol levels; mammography; and coronary artery bypass grafts. Balloon angioplasty came from Europe, four innovations on the list were developed in American hospitals or by American companies (although statins were based on earlier Japanese research), and mammography was first developed in Germany and then improved in the United States. Even when the initial research is done overseas, the American system leads in converting new ideas into workable commercial technologies.
In real terms, spending on American biomedical research has doubled since 1994. By 2003, spending was up to $94.3 billion (there is no comparable number for Europe), with 57 percent of that coming from private industry. The National Institutes of Health’s current annual research budget is $28 billion, All European Union governments, in contrast, spent $3.7 billion in 2000, and since that time, Europe has not narrowed the research and development gap. America spends more on research and development over all and on drugs in particular, even though the United States has a smaller population than the core European Union countries. From 1989 to 2002, four times as much money was invested in private biotechnology companies in America than in Europe.
Dr. Thomas Boehm of Jerini, a biomedical research company in Berlin, titled his article in The Journal of Medical Marketing in 2005 “How Can We Explain the American Dominance in Biomedical Research and Development?” (ostina.org/downloads/pdfs/bridgesvol7_BoehmArticle.pdf) Dr. Boehm argues that the research environment in the United States, compared with Europe, is wealthier, more competitive, more meritocratic and more tolerant of waste and chaos. He argues that these features lead to more medical discoveries. About 400,000 European researchers are living in the United States, usually for superior financial compensation and research facilities.
This innovation-rich environment stems from the money spent on American health care and also from the richer and more competitive American universities. The American government could use its size, or use the law, to bargain down health care prices, as many European governments have done. In the short run, this would save money but in the longer run it would cost lives. [emphasis added]
Dr Paul Hsieh at Pajamas Media blogs about the economic consequences of this tax. Here's CEO Richard Packer of Zoll Medical, makers of devices designed to stop cardiac arrests like defibrillators, explaining on Fox News to Neil Cavuto the consequences of what this tax means for his company:
PACKER: So, for our company, it will be somewhere between $5 and $10 million. What's in the current bill from the House should put it at 2.3 percent, which will be about $7.5 million dollars. Our total profit last year was $9.5 million dollars.
CAVUTO: So, it almost wipes out your profits?
PACKER: So, it almost wipes out our profits.
CAVUTO: So, you have a couple of choices here. You cut jobs or send them overseas, or you increase the price of your product, not easy to do.
PACKER: Yes, or cut back on research and development. And our business is built around new science, new clinical trials.
CAVUTO: Or a lot more people die as a result. They don't get your....
(CROSSTALK)
PACKER: That's right. [emphasis added]
Just this week, the Boston Herald highlighted that medical-device makers in the Bay State will have to cut back on operating costs due to the tax: (H/T: Hotair)
Massachusetts medical-device companies say they’ll cut back on operational costs - and jobs - after a planned 2.3 percent tax on their products is implemented in 2013, according to a new survey.
The Massachusetts Medical Device Industry Council, which held its annual meeting yesterday in Boston, said about 90 percent of the 100 medical-device firms said they would reduce costs due to the new tax tucked into the recently passed health-care reform bill.
The tax - imposed to help pay for the massive health-care industry overhaul and expansion - is “of the greatest concern” to a majority of its members, the survey found.
Now it is true that medical technology is one of the major causes of the rise in health care costs. Keith Hennessy uses this chart from the CBO that summed up 2 key studies on this very topic:
As he points out, technology accounts for half to 2/3 of long term growth in per capita spending. But he also notes how the preferential tax treatment of employer provided health care distorts the incentive for Americans to consume more care. Here he sums up the conundrum:
Any solution that addresses the technology source of health care cost growth will mean that new medical technologies will be developed less rapidly.
Nobody in Washington wants to tell you that last point. We argue about administrative costs, about medical liability costs, about insurance company profits, and about waste, fraud, and abuse. All of those are important contributing factors to high levels of health spending, and we should definitely make reforms that try to lower those levels. But our long-term problem is principally about the growth rate, and addressing the growth rate involves a real tradeoff. New medical technologies and drugs will still be developed, but not quite at the breakneck rate that we’re used to. This is grasping the rose by the thorn.
The only question left then becomes who will make those determinations. Should determinations of “high value health care” and “high value technology improvements” be made by the government, or as the result of the decisions of millions of Americans acting independently based on their own preferences?
It's ironic that "progressives" do not want to acknowledge that government centralization of health care does indeed squash innovation. Some will argue that the government can fund innovation just as well as the private sector, pointing out the successful example of the NIH, but Megan McArdle and Tyler Cowen do quite well in disputing their arguments not by denigrating the NIH, but pointing out the importance of the commercial sector alongside the NIH. Keith's questions outlines one of the stark contrasts between liberals and conservatives: who do you trust more on price discovery and delivery of the most innovative of medical technologies? The market or the government? This leads well into my next blog on health care, where cutting costs will ultimately lead to rationed care.
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