The Deadly Tax on Medical Innovation

by | Apr 11, 2010 | Healthcare

A government that penalizes innovation could dramatically slow the pace of medical progress, leading to millions of preventable deaths. And this may be one of the worst long-range consequences of the recently passed ObamaCare health legislation.
Most technology aficionados are familiar with Moore’s Law, which states that computing power tends to double roughly every two years. The average American experiences this most clearly when purchasing personal computers. In 1998, Apple introduced its iMac computer with a 233 MHz processor, 32 MB RAM, and 4 GB hard drive, for a price of $1300. In 2010, Apple’s low-end iMac includes a 3.06 GHz processor, 4 GB RAM, and a 500 GB hard drive for $1200. This represents a greater than 10-fold increase in processor speed and over 100-fold increases in RAM and hard drive sizes for roughly the same nominal dollar amount (30% fewer real dollars after adjusting for inflation).

Similar but more quiet progress has also occurred with medical technology. During my medical career, MRI scanners have advanced from creating crude but workable images of brain tumors to generating high-resolution scans displaying not just their anatomic extent, but also their internal chemical composition and the extent of functional disruption caused to the rest of the brain architecture. These advances allow doctors to plan surgery and radiation treatments in an extremely precise fashion to remove the tumor while preserving as much normal brain function as possible. As Clayton Cramer has observed, modern American medicine is much closer to the Star Trek “Sickbay” than doctors could have imagined a mere 20 years ago.

Raymond Kurzweil has generalized Moore’s Law as “The Law of Accelerating Returns,” arguing that technological progress overall follows a roughly exponential curve. This exponential curve is a natural reflection of the fact that today’s progress forms the base of tomorrow’s innovation. This create a virtuous cycle in which innovators continually build on each other’s work, adding to an ever-increasing fund of knowledge, which in turn allows for future innovations. When people are left free to innovate, the exponential gains they create are therefore akin to the exponential growth we see in our bank balances when we allow compound interest to operate over time.

However, such exponential gains are not automatic. Moore’s Law (and Kurzweil’s generalization) are not laws of nature. Instead, they presuppose a system of government that leaves innovators free to create. Conversely, a government that penalizes innovation could dramatically slow the pace of medical progress, leading to millions of preventable deaths. And this may be one of the worst long-range consequences of the recently passed ObamaCare health legislation.

One of the many new taxes imposed by ObamaCare is a 2.3% excise tax on medical device manufacturers. Although this may not seem like much, it could be devastating to small companies working with thin profit margins.

For instance, the Zoll Medical Corporation is one of the leading manufacturers of automated external defibrillators (AEDs). These devices are commonplace in airports, shopping malls, and other public places. They are meant to be used by members of the general public to give immediate life-saving electrical shocks to someone suffering sudden cardiac arrest.

Advances in hardware and software have made these devices sufficiently reliable that they can be safely used by “Good Samaritan” bystanders with no formal medical training. The AED device itself analyzes the patient’s electrical rhythm and gives voice instructions to the user as to whether and when to safely shock the patient. According to a recent paper in the New England Journal of Medicine, making AEDs widely available to the public could significantly improve the survival rates of cardiac arrest patients.

However, the ObamaCare tax would impose an additional $7.5 million annual burden on Zoll, nearly eliminating their annual profit of $9.5 million. As their CEO Richard Packer recently explained on a Fox News interview with Neil Cavuto:

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

[Emphasis mine.]

To make matters worse, it is the small startup companies which are the engine of so much innovation that would be disproportionately harmed by this tax.

ObamaCare could thus strangle many promising developments in their cradles before they ever reached the marketplace, such as new cancer treatments, handheld diagnostic equipment, nanotechnology, etc.

And the worst aspect is that we will never know what new technologies could have been developed and how many lives they could have saved — an example of Frederic Bastiat’s principle of the seen and the unseen. As with any exponential process, small changes in the rate of growth will have a dramatic effect on the final total after twenty years.

Most investors already know this. An initial investment of $5,000 compounded at an annual rate of 2% would yield $9,000 after 30 years. If the interest rate were 8%, the return would be over $50,000. If the interest rate were 12%, the return would be nearly $180,000.

Although the investor receiving the 8% return rate would certainly be better off than the investor earning only 2%, he’ll never know how much more he would have enjoyed with a 12% return.

Similarly, we will still see some medical advances over the next 20 years despite ObamaCare. But what additional life saving advances will be stifled because of this deadly tax on innovation? Will we miss out on cures for Alzheimer’s disease, stroke, or breast cancer?

Fortunately, Americans can still enjoy these future benefits. But to do so, we must demand that our politicians repeal ObamaCare and instead implement free-market reforms that leave companies free to innovate and leave consumers free to spend their own medical dollars for their best interest. The resultant explosion in medical innovation could transform and improve our lives over the next 20 years at least as much as innovations in computer technology have done in the past 20 years.

For most people, using a 1998 home computer to surf the internet in 2010 would be unthinkable. For most doctors, using 1998 medical technology to treat brain tumors in 2010 would border on malpractice. When you need medical care in 2020, don’t let the regulatory state handcuff your doctor with 2010-era technology. Your life may depend on it.

This article originally appeared at PajamasMedia and is appearing on Capitalism Magazine with PJM’s permission. You can read the original article here.

Paul S. Hsieh, MD, is a physician in practice in the south Denver metro region and he is a founding member of the Colorado group "Freedom and Individual Rights in Medicine" (

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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