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The Long-Run Impacts of Regulated Price Cuts: Evidence from Medicare

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  • Yunan Ji
  • Parker Rogers

Abstract

We investigate the effects of substantial Medicare price reductions in the medical device industry, which amounted to a 61% decrease over 10 years for certain device types. Analyzing over 20 years of administrative and proprietary data, we find these price cuts led to a 25% decline in new product introductions and a 75% decrease in patent filings, indicating significant reductions in innovation activity. Manufacturers decreased market entry and increased outsourcing to foreign producers, associated with higher rates of product defects. Our calculations suggest the value of lost innovation may fully offset the direct cost savings from the price cuts. We propose that better-targeted pricing reforms could mitigate these negative effects. These findings underscore the need to balance cost containment with incentives for innovation and quality in policy design.

Suggested Citation

  • Yunan Ji & Parker Rogers, 2024. "The Long-Run Impacts of Regulated Price Cuts: Evidence from Medicare," NBER Working Papers 33083, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33083
    Note: AG EH PE
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    More about this item

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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