Costly Health Care Reform Harmful Rx for Innovation

Would you like to pay more for your eyeglasses? What about hearing aids? Health insurance and prescription drugs? You would pay more for all of these under the emerging health reform legislation in Washington.

Paying more for health care is not the change most Americans had in mind last November.

Think of how many times then-candidate Barack Obama said his health care plan would save the average family $2,500 per year. But as congressional leaders attempt to raise taxes on small businesses and impose penalties on employers, it is far more likely that the average family would pay an extra $2,500 per year.

What if businesses defied the laws of economics and didn't pass the $40 billion tax onto consumers? Would that help? Hardly.

The latest examples are the new taxes proposed by U.S. Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee. To pay for his health reform plan, he would levy more than $140 billion in new taxes over the next 10 years on drug makers, health insurers and companies that make medical devices.

It is Economics 101 to know that when government levies a tax, it is not the business that will ultimately pay it--consumers will. So the $23 billion tax on drug makers won't dent their revenue. It will make your medications more expensive.

The $67 billion tax on health insurers won't hurt insurance companies. It will raise your premiums. So said the director of the Congressional Budget Office: "That piece of the legislation would raise insurance premiums by roughly the amount of the money collected."

Look closely at the impact of a tax on medical device companies. There are more than 80,000 medical devices in the United States, everything from artificial heart valves, pacemakers and NICU incubators to thermometers and toothbrushes.

The $40 billion tax on device makers would raise the price for thousands of products. Consumers would pay more directly through higher insurance premiums or lost wages when an employer has to pay. Thomas Barthold, chief of staff of the Joint Committee on Taxation, said this past week: "We have analyzed this as largely falling on the consumer."

What if businesses defied the laws of economics and didn't pass the $40 billion tax onto consumers? Would that help? Hardly.

Medical technology manufacturers spend an estimated $9 billion a year on researching new technologies. Today's unproven breakthroughs are tomorrow's routine and inexpensive cures. Confiscating $4 billion a year from the industry's research-and-development budget would turn the clock back on innovation.

Sen. John Kerry, D-Mass., agrees: "I am concerned that the bill includes a new fee on medical devices that could stifle innovation and limit the technology advances that are really critical to help reduce health care costs."

Legislation in both the House and Senate would create new federal bureaucracies like the Independent Medicare Advisory Council, the Health Choices Administration and the National Health Insurance Exchange with the power to determine what Medicare and private insurance plans will cover, from diagnostics, laboratories and imaging to new, innovative drugs and treatments.

The House legislation also would create a government insurance plan to compete in the private market. For the nearly 120 million Americans that the Lewin Group estimates could drop private coverage and enroll in this plan, the government would determine which innovations you could access and which breakthroughs you could use to improve your health.

Add in Medicare's current 45 million beneficiaries and Medicaid's 58 million, and federal bureaucrats would have the power to determine which technologies and innovations could be accessed by more than 220 million Americans. Sadly, patients would ultimately suffer. Could a new breakthrough help anyone if government blocks individuals from using it?

Even if government decides to cover certain technologies and breakthroughs, access would further be restricted by rigid payment rules and low reimbursement rates to doctors, providers and suppliers.

For example, innovation has enabled MRI and CAT scan machines to migrate out to doctors' offices, where easy, efficient access enables earlier detection of serious illnesses such as lung cancer. If lung cancer is detected and treated before it spreads, the five-year survival rate is higher than 70 percent. But only 16 percent of those diagnosed with the disease survive longer than five years because it is usually detected too late.

A proposal in the House changes the Medicare reimbursement formula to restrict access to advanced imaging equipment by eliminating it from doctors' offices, which would force seniors to go to hospitals to get the examination.

While the U.S. health care system absolutely needs to be transformed, innovation is a key part of the solution, not part of the problem.

We need to promote--not punish--innovation, science and technology. Taxing innovation, raising costs on consumers and suffocating research is a recipe for disaster, not transformation.

Newt Gingrich is a senior fellow at AEI. David Merritt is a project director at the Center for Health Transformation.

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