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Medical Innovation in Obama Land?

Shikha Dalmia
November 23, 2009, 2:43pm

Undoubtedly, one of the biggest casualties of ObamaCare will be medical innovations. A recent Cato Institute study found that America leads the world in innovations in basic sciences, diagnostics, and therapeutics. In fact, the US has contributed more than any other country, and in some cases, more than all countries combined, in these areas.

Why? Because, as this reason.tv video notes, America is the only country in the West that has resisted (more or less) the urge to tamper with the profit motive by imposing price controls on drug and device makers. Secure in the knowledge that they will have a market for their billions of dollars in investments, these companies have developed all kinds of life-saving technologies from cholesterol-busting drugs to MRIs from which the entire world benefits.

But here is the issue for policy wonks: Are these innovations "efficient," meaning reflective of the true choices of consumers? Our tax code gives employers a huge tax break when they offer generous health coverage to their workers. This arguably causes Americans to over-consume all kinds of medical services because they have little incentive to ask if the marginal benefit that, say, a particular drug or diagnostic procedure will deliver is worth its marginal cost.

This over-consumption to some extent has made America the font of new medical innovations. But the problem is that this comes with an opportunity cost. The needs in an economy always exceed the resources available to satisfy them. Hence, when government policies force people to over-consume in one area, they inevitably draw resources from some other area where, in fact, consumers, left to their own devices, might prefer to spend their money. So, who knows, if not prompted by bad government policies to divert their wages to health care, Americans might prefer to spend them on dining out, traveling or reading. Who knows to what extent the innovatiness of the American health care sector has been purchased by depressing innovations in the food, travel and publishng sectors?

The only way to fix this problem is by removing the tax subsidies from health care and leveling the playing field across industries. Instead, ObamaCare will raise the health care subsidies and then try and prevent over-consumption of medical services by rationing care.

The result will be total economic uncertainty that drives out both medical innovations and delivers inferior care without producing any gains in any other sector of the economy.

This is how developing countries turned into economic basket-cases. Welcome to Obama Land.


Shikha Dalmia is Senior Analyst


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