The Effect of U.S. Health Insurance Expansions on Medical Innovation

I study the effect of health insurance expansions on medical innovation. Practitioner dominated innovation (Roberts, 1988) creates an important role for the incentives in “local” payment systems as drivers of medical technology development. I show that, over the 15 years following Medicare and Medicaid’s passage, U.S.-based patenting shifted towards medical equipment by nearly 1.5 percentage points (50 percent) more than foreign patenting. This did not reflect a more general, U.S.-specific trend towards health-sector innovation; no such increase occurred among pharmaceutical patents, the markets for which were unaffected. Subsequent decreases in cost-sharing for all health spending are also associated with increases in U.S.-based patenting relative to foreign patenting in the relevant areas. Back-of-the-envelope calculations suggest that the dynamic effect of U.S. insurance expansions may account for around 25 percent of global medical-equipment innovation and 15 percent of the rise in U.S. health spending in hospitals, physicians’ offices, and other clinical settings from 1960 to 2010.