The Cost of Cutting Medical Innovation

While “innovation” continues to be a politically correct buzzword in Washington, much of the health care reform debate missed the boat on this critical component of ongoing U.S. leadership. To wit, while members of Congress agree that innovation drives jobs, improves our quality of life and is the key to our economic future, none of the reform proposals fully embraced the importance of bringing new medical technologies to market more efficiently. As we know, it is innovation that will keep the United States competitive and ultimately drive down costs, but the discovery and commercialization process must be supported through public policy. Yet, to date, Congress has not risen to the occasion.

For example, the proposal that has been the most concerning and the most illustrative of misguided policy is the multi-billion dollar tax placed on the medical device industry. The original bill included taxing medical device companies, including small startups, on revenue, not profits. Such tax policy would harm those fragile companies which serve almost exclusively as the innovation pipeline for our health care system. Taxing the revenue of companies that are not yet profitable would cause catastrophic changes to their business models. In an effort to raise tax revenue, Congress may indeed kill medical device innovation with this policy.

Clearly, there is another way.

Policy makers and influencers including Congress, the Food and Drug Administration, and the Centers for Medicare & Medicaid Services must commit to work together to ensure that innovation does not become a casualty of health care reform. This approach, of which we have seen glimmers, requires a commitment to policies that are specifically developed to protect, not stifle, small emerging growth companies. One example includes the Cures Acceleration Network (CAN) provision sponsored by Sen. Arlen Specter. Established under National Institutes of Health, CAN will help speed the development of next-generation medicines, treatments and cures by providing federal grants to promising therapies and technologies. CAN will also help expedite FDA review of highly innovative safe and effective treatments for patients. Such programs will reap substantial rewards, perhaps not immediately, but over time.

Taxing the revenue of companies that are not yet profitable would cause catastrophic changes to their business models.

This long term, innovation-centric approach should be fairly intuitive, as we can all agree that it is less expensive for people to live in good health than in poor health. While medical innovation may sometimes drive costs upwards in the short term, the overall costs to the system—the final health outcomes—must be recognized. For example, reformers may dwell on the high cost of a stent procedure, but conveniently ignore the cost savings of avoiding open heart surgery and the expensive after care that takes place during recovery. Stalwart health care providers such as InterMountain Healthcare, the Mayo Healthcare System and the Cleveland Clinic prove this notion ongoing, as these facilities operate at lower costs in part as a result of their use of innovative devices and delivery systems.

According to a study by Medtap International, medical technology innovations reduced hospital days by 56% between 1980 and 2000. With personalized medicine and wireless monitoring advances on the horizon, this percentage is poised to increase substantially in the decades to come. Costs will come down, and precipitously so. There is no reason why we can’t have cost savings and innovation at the same time, but not if we can’t protect the innovators.

As the battle between the hidden hand and the law of unintended consequences rages on, the fate of the U.S. economy and medical innovation hangs in the balance. This is a time when government should be doing all it can to get innovative medical products to market and create jobs. Not until we can guarantee the health of innovation can we guarantee the health of our system, our economy or our citizens.

Harry Rein is a general partner with Foundation Medical Partners and an active member of the NVCA’s Medical Industry Group. He can be reached at