IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/29438.html
   My bibliography  Save this paper

The Economics of Medical Procedure Innovation

Author

Listed:
  • David Dranove
  • Craig Garthwaite
  • Christopher Heard
  • Bingxiao Wu

Abstract

This paper explores the economic incentives for medical procedure innovation. Using a proprietary dataset on billing code applications for emerging medical procedures, we highlight two mechanisms that could hinder innovation. First, the administrative hurdle of securing permanent, reimbursable billing codes substantially delays innovation diffusion. We find that Medicare utilization of innovative procedures increases nearly nine-fold after the billing codes are promoted to permanent (reimbursable) from provisional (non-reimbursable). However, only 29 percent of the provisional codes are promoted within the five-year probation period. Second, medical procedures lack intellectual property rights, especially those without patented devices. When appropriability is limited, specialty medical societies lead the applications for billing codes. We indicate that the ad hoc process for securing billing codes for procedure innovations creates uncertainty about both the development process and the allocation and enforceability of property rights. This stands in stark contrast to the more deliberate regulatory oversight for pharmaceutical innovations.

Suggested Citation

  • David Dranove & Craig Garthwaite & Christopher Heard & Bingxiao Wu, 2021. "The Economics of Medical Procedure Innovation," NBER Working Papers 29438, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:29438
    Note: HC HE IO PE PR
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w29438.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Clément de Chaisemartin & Xavier D'Haultfœuille, 2020. "Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects," American Economic Review, American Economic Association, vol. 110(9), pages 2964-2996, September.
    2. DiMasi, Joseph A. & Grabowski, Henry G. & Hansen, Ronald W., 2016. "Innovation in the pharmaceutical industry: New estimates of R&D costs," Journal of Health Economics, Elsevier, vol. 47(C), pages 20-33.
    3. von Hippel, Eric, 1976. "The dominant role of users in the scientific instrument innovation process," Research Policy, Elsevier, vol. 5(3), pages 212-239, July.
    4. Jeffrey P. Clemens & Morten Olsen, 2021. "Medicare and the Rise of American Medical Patenting: The Economics of User-Driven Innovation," CESifo Working Paper Series 9008, CESifo.
    5. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
    6. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1049-1090.
    7. Pierre Dubois & Olivier de Mouzon & Fiona Scott-Morton & Paul Seabright, 2015. "Market size and pharmaceutical innovation," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 844-871, October.
    8. Jeffrey Clemens & Joshua D. Gottlieb, 2017. "In the Shadow of a Giant: Medicare’s Influence on Private Physician Payments," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 1-39.
    9. Leila Agha & David Molitor, 2018. "The Local Influence of Pioneer Investigators on Technology Adoption: Evidence from New Cancer Drugs," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 29-44, March.
    10. Nordhaus, William D, 1969. "An Economic Theory of Technological Change," American Economic Review, American Economic Association, vol. 59(2), pages 18-28, May.
    11. Z. John Lu & William S. Comanor, 1998. "Strategic Pricing Of New Pharmaceuticals," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 108-118, February.
    12. Benjamin Berger & Amitabh Chandra & Craig Garthwaite, 2021. "Regulatory Approval and Expanded Market Size," NBER Working Papers 28889, National Bureau of Economic Research, Inc.
    13. David C Chan & Michael J Dickstein, 2019. "Industry Input in Policy Making: Evidence from Medicare," The Quarterly Journal of Economics, Oxford University Press, vol. 134(3), pages 1299-1342.
    14. Amy Finkelstein, 2004. "Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 527-564.
    15. Jeffrey P. Clemens & Parker Rogers, 2020. "Demand Shocks, Procurement Policies, and the Nature of Medical Innovation: Evidence from Wartime Prosthetic Device Patents," CESifo Working Paper Series 8781, CESifo.
    16. David Dranove & Craig Garthwaite & Manuel I. Hermosilla, 2020. "Expected Profits and The Scientific Novelty of Innovation," NBER Working Papers 27093, National Bureau of Economic Research, Inc.
    17. Abadie, Alberto & Diamond, Alexis & Hainmueller, Jens, 2010. "Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program," Journal of the American Statistical Association, American Statistical Association, vol. 105(490), pages 493-505.
    18. David Dranove & David Meltzer, 1994. "Do Important Drugs Reach the Market Sooner?," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 402-423, Autumn.
    19. Leila Agha & Soomi Kim & Danielle Li, 2020. "Insurance Design and Pharmaceutical Innovation," NBER Working Papers 27563, National Bureau of Economic Research, Inc.
    20. Clemens, Jeffrey & Gottlieb, Joshua D. & Molnár, Tímea Laura, 2017. "Do health insurers innovate? Evidence from the anatomy of physician payments," Journal of Health Economics, Elsevier, vol. 55(C), pages 153-167.
    21. Stern, Ariel Dora, 2017. "Innovation under regulatory uncertainty: Evidence from medical technology," Journal of Public Economics, Elsevier, vol. 145(C), pages 181-200.
    22. Eric von Hippel, 2006. "Democratizing Innovation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262720477, February.
    23. David Dranove & Craig Garthwaite & Manuel Hermosilla, 2014. "Pharmaceutical Profits and the Social Value of Innovation," NBER Working Papers 20212, National Bureau of Economic Research, Inc.
    24. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
    25. Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, vol. 5(2), pages 129-151, June.
    26. Joseph A. DiMasi & Henry G. Grabowski, 2007. "The cost of biopharmaceutical R&D: is biotech different?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 469-479.
    27. Nicholas Bagley & Benjamin Berger & Amitabh Chandra & Craig Garthwaite & Ariel D. Stern, 2019. "The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century," Innovation Policy and the Economy, University of Chicago Press, vol. 19(1), pages 97-137.
    28. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    29. Ward, Michael R & Dranove, David, 1995. "The Vertical Chain of Research and Development in the Pharmaceutical Industry," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 70-87, January.
    30. Weisbrod, Burton A, 1991. "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 523-552, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Margaret K. Kyle, 2019. "The Alignment of Innovation Policy and Social Welfare: Evidence from Pharmaceuticals," NBER Chapters, in: Innovation Policy and the Economy, Volume 20, pages 95-123, National Bureau of Economic Research, Inc.
    2. Agarwal, Ruchir & Gaule, Patrick, 2022. "What drives innovation? Lessons from COVID-19 R&D," Journal of Health Economics, Elsevier, vol. 82(C).
    3. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
    4. Gamba, Simona & Magazzini, Laura & Pertile, Paolo, 2021. "R&D and market size: Who benefits from orphan drug legislation?," Journal of Health Economics, Elsevier, vol. 80(C).
    5. Leila Agha & Soomi Kim & Danielle Li, 2020. "Insurance Design and Pharmaceutical Innovation," NBER Working Papers 27563, National Bureau of Economic Research, Inc.
    6. Jeffrey P. Clemens & Morten Olsen, 2021. "Medicare and the Rise of American Medical Patenting: The Economics of User-Driven Innovation," CESifo Working Paper Series 9008, CESifo.
    7. Massimo Florio & Simona Gamba, 2021. "Biomed Europa: After the coronavirus, a public infrastructure to overcome the pharmaceutical oligopoly," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 92(3), pages 387-409, September.
    8. Volker Grossmann, 2021. "Medical Innovations and Ageing: A Health Economics Perspective," CESifo Working Paper Series 9387, CESifo.
    9. Hermosilla, Manuel & Wu, Yufei, 2018. "Market size and innovation: The intermediary role of technology licensing," Research Policy, Elsevier, vol. 47(5), pages 980-991.
    10. Manuel Hermosilla, 2021. "Rushed Innovation: Evidence from Drug Licensing," Management Science, INFORMS, vol. 67(1), pages 257-278, January.
    11. Jeffrey P. Clemens & Parker Rogers, 2020. "Demand Shocks, Procurement Policies, and the Nature of Medical Innovation: Evidence from Wartime Prosthetic Device Patents," CESifo Working Paper Series 8781, CESifo.
    12. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484, National Bureau of Economic Research, Inc.
    13. Dubois, Pierre & Gandhi, Ashvin & Vasserman, Shoshana, 2022. "Bargaining and International Reference Pricing in the Pharmaceutical Industry," Research Papers 3889, Stanford University, Graduate School of Business.
    14. Arzi Adbi & Chirantan Chatterjee & Matej Drev & Anant Mishra, 2019. "When the Big One Came: A Natural Experiment on Demand Shock and Market Structure in India's Influenza Vaccine Markets," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 810-832, April.
    15. Jeffrey Clemens & Stan Veuger, 2017. "Risks To The Returns To Medical Innovation: The Case Of Myriad Genetics," Contemporary Economic Policy, Western Economic Association International, vol. 35(2), pages 345-357, April.
    16. Mark Pauly & Kyle Myers, 2016. "A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity," NBER Working Papers 22720, National Bureau of Economic Research, Inc.
    17. Sanzenbacher, Geoffrey T. & Wettstein, Gal, 2020. "Drug insurance and the strategic behavior of drug manufacturers: Evergreening and generic entry after Medicare Part D," Journal of Health Economics, Elsevier, vol. 72(C).
    18. Jobjörnsson, Sebastian & Forster, Martin & Pertile, Paolo & Burman, Carl-Fredrik, 2016. "Late-stage pharmaceutical R&D and pricing policies under two-stage regulation," Journal of Health Economics, Elsevier, vol. 50(C), pages 298-311.
    19. Jillian Chown & David Dranove & Craig Garthwaite & Jordan Keener, 2019. "The Opportunities and Limitations of Monopsony Power in Healthcare: Evidence from the United States and Canada," NBER Working Papers 26122, National Bureau of Economic Research, Inc.
    20. Higgins, Matthew J. & Yan, Xin & Chatterjee, Chirantan, 2021. "Unpacking the effects of adverse regulatory events: Evidence from pharmaceutical relabeling," Research Policy, Elsevier, vol. 50(1).

    More about this item

    JEL classification:

    • I0 - Health, Education, and Welfare - - General
    • I1 - Health, Education, and Welfare - - Health
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:29438. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.