New Taxes Could Undermine Medical Innovation

Published November 5, 2010


Heart disease is our nation’s leading cause of death, killing more than 600,000 people last year, but modern medical technologies are helping save thousands of these lives and will save even more if research can continue.

Electric paddles, known as automated external defibrillators (AEDs), are used to awaken stopped hearts. You may have noticed brightly colored boxes containing AEDs in airports and other public spaces. Just a few years ago, these devices could only be used by trained medical professionals. Because of continued innovation, AEDs now can automatically analyze the electrical rhythm of a heart attack victim and even give voice instructions so untrained bystanders can use them.

But a number of makers of medical devices are worried new taxes will starve them of funds for further research and could even put some of them out of business.

Anti-Innovation Taxation

Richard Packer, chief executive officer of Zoll Medical Corp.—which makes cutting-edge AEDs, is one of those. He says a 2.3 percent tax on medical devices in the new health care law will increase his company’s tax bill by $7.5 million.

Like many companies on the forefront of medical innovation, Zoll Medical is not a corporate behemoth. It turned a profit of $9.5 million last year. In other words, this new tax could eliminate nearly 80 percent of its profits, leaving the company almost no money to invest in research and development.

The cautionary tale of Zoll Medical underscores the need to consider carefully the impact of tax policy and other laws on the vital field of medical innovation.

Surveying recent medical advances is like reading a science-fiction novel. Proton-beam therapy can vaporize tumors with no damage to nearby tissue. DNA mapping is enabling doctors to determine—before chemotherapy starts—which cancer patients will likely respond best to which treatments. Telemedicine is extending medical expertise to once unimaginable frontiers: A specialist with an iPad can instantly consult on medical images sent to him from doctors in rural areas and even from other countries.

Expensive Investment Area

Modern medical innovations are dramatically expanding life expectancy and quality of life. However, medical-device and pharmaceutical research continues to be one of the most costly—and risky—investments in the health sector. The pharmaceutical industry spent nearly $59 billion on research and development in 2007, yet just 24 new drugs were approved last year.

For every 5,000 to 10,000 compounds tested, just five will make it to clinical trials. Of those five, just one of those will receive U.S. Food and Drug Administration approval. And then, just two out of every 10 drugs that reach the market will recoup the costs invested in creating and developing the drug.

Taxes That Cost Lives

The United States is the medicine chest for the world. If U.S. firms slow their research spending, medical innovation will be reduced dramatically worldwide. In 2007, more than 2,700 new medical compounds were under development in the United States, compared to 1,700 in the whole rest of the world.

Continued pharmaceutical innovation also saves lives. The large upfront costs of developing new drugs seem justified because drug innovation ultimately helps save money on other medical costs. Every dollar spent on newer drugs in the United States saves $7 in other health spending.

Health outcomes are improving as a result of these investments. Between 1991 and 2004, life expectancy in the United States increased by 2.37 years, according to Columbia University economist Frank Lichtenberg. Lichtenberg says new drugs and new medical imaging technologies, like MRIs and CAT scans, were responsible for almost all of this increase.

It is crucial that government support and not undermine innovation in lifesaving and life-enhancing medicines and technologies. Policies that tax away the money that companies spend on medical research will lower the quality of care for this generation and future ones. And it will cost lives.

Grace-Marie Turner ([email protected]) is president of the Galen Institute. This column is adapted from an article on the institute’s website at Reprinted with permission.