Medicare and the Rise of American Medical Patenting: The Economics of User-Driven Innovation

Abstract

Innovation is part idea generation and part development. We build a model of "innovating-bydoing," whereby ideas come to practitioners. Successful innovation requires that practitioners' ideas be developed through costly effort. Our model nests existing theories of laboratory research and learning-by-doing. Empirically, we analyze the effect of the U.S. Medicare program on medical equipment innovation. Our model's structure allows us to infer the Medicare program's aggregate effects. We estimate that Medicare's introduction led to a 20 to 30 percent increase in medical equipment patenting across the United States, of which roughly half is due to the innovating-by-doing channel.

Health insurance, endogenous medical progress, health expenditure growth, and welfare

“…We also find that the expansion of health insurance has induced substantial medical R&D. Namely, it raises the rate of medical progress by about 57% over the time span 1965 to 2005 and by about 39% over the time span 1965 to 1990. The latter compares to a 20%-30% increase in medical equipment and device patenting over the same time span that Clemens and Olsen (2021) estimate as a consequence of the introduction of Medicare/Medicaid. We decompose the insurance induced increase in health care spending into a moral hazard effect associated with the subsidization of health care, and the spending increase associated with induced medical change.…”

“…In addition to the direct impact of health insurance on medical spending, Weisbrod (1991) has conjectured an indirect pathway, namely that the expansion of health insurance coverage created incentives to develop new medical technology. Clemens and Olsen (2021) find empirical support for this hypothesis 3 : 20 to 30 percent of medical equipment and device innovation between 1965 and 1990 is explained by the introduction of Medicare/Medicaid in 1965. 4 In a related analysis, Finkelstein (2007) shows that health insurance, does, indeed, explain a spending increase that is more than six times larger than the one suggested by the RAND health insurance experiment once macroeconomic responses, such as induced entry into the hospital market, are accounted for.…”

“…Against the backdrop of these somewhat patchy findings, we study the insurance-spending-innovation nexus in health care within a coherent general equilibrium model of overlapping generations (OLG) who purchase health care, the effectiveness of which is governed by endogenous medical progress. This provides us with a deeper understanding of the mechanisms underlying the empirical findings by Finkelstein (2007), and Clemens and Olsen (2021) and affords new insights about the interaction of income, health insurance and medical progress. Going beyond what is identifiable in the empirical literature, we show that the US health insurance expansion was welfare improving through the stimulation of medical progress, despite sizeable negative welfare effects through moral hazard.…”

“…Both the health care sector and the medical R&D sector employ capital and labour, competing for resources with a final goods production sector. We should stress early on that, following Finkelstein (2007) and Clemens and Olsen (2021), we focus entirely on the subsidy-character of health insurance. Thus, in a setting in which public health insurance is financed out of taxes and private health insurance out of premia that are fixed at the equilibrium/average level of expenditure, our analysis takes explicit account of the fact that health insurance is generating an incentive for excessive consumption of health care, labelled ''ex-post moral hazard'' by health economists (e.g.…”

“…Again, the role of health insurance is not examined. 7 The macroeconomic impact of US health insurance (reform) features in Tran (2016, 2022), Conesa et al (2018), Cole et al (2019) and Kelly (2020. In all studies but Kelly (2020) survival is exogenous to the utilization of health care, and none of the studies considers medical progress.…”