Some notes on innovation in health care

  • Rightly or wrongly, the U.S. is often thought of as the global health care innovation leader, pioneering the best devices, drugs, and techniques, and home to the top medical schools.
  • Perhaps a less commonly held, but a fairly pervasive, belief is that regulation unduly stifles innovation in the health care sector, and no more so than with respect to health insurance. For obvious reasons, Obamacare has become the leading health care over-regulation exemplar, harming consumers with government’s heavy (far from invisible) hand.
  • Reihan Salam: “[Obamacare] limits innovation by insurers and providers that can help contain costs. […] The big problem with the Obamacare exchanges is that they don’t give insurers the option of offering consumers a wide range of products suited to their needs, and they don’t offer enough flexibility on pricing. […] Obamacare is narrowly constraining the kind of products available on the marketplaces.”
  • Epstein and Hyman: “PPACA’s fundamental design defect was to superimpose additional layers of regulation and subsidies on a system that was already top-heavy with both. These preexisting regulations and subsidies have already misaligned the incentives within the health care system. The next generation of rules will only compound the errors. In our view, the right approach to these problems is to promptly initiate a program of systematic deregulation that will introduce the choice and competition to which PPACA gives, at best, lip service.  […] All else being equal, the greater the level of market freedom, the higher the level of innovation and the wider the range of choices will be. When government regulators seek to place certain arrangements out of bounds, they restrict the scope of this inventive behavior. The fewer remaining options for potential trading partners means that the search for joint gains will be subject to constraints that produce two kinds of large social losses: (i) increased costs of public oversight, and (ii) inferiority of the private responses that are acceptable in light of that oversight.”
  • In a December 2013 NBER working paper, Jeffrey Clemens estimated the effect of insurance on medical innovation, finding that U.S. insurance expansions (including Medicare and Medicaid) “account for 25 percent of recent, worldwide medical-equipment patenting.” The vector for this relationship is the flow of well-insured patients through the hands and laboratories (e.g., hospitals) of skilled practitioners. Largely shielded from price — and in the context of no serious attempts to manage technology — the (insured) U.S. patient population is arguably the best substrate for innovation. The ACA’s coverage expansion is, therefore, a force for accelerating innovation. However, the law also includes some potential brakes: a tax on medical devices, Medicare payment reductions, movements away from fee-for-service, though that could “increase the rewards for innovation of the cost-conscious variety.”
  • In a December 2013 article in The Review of Economics and Statistics, Aamir Hashmi reexamines the relationship between competition and innovation in U.S. manufacturing. Interestingly, he finds a negative correlation. “Schumpeter (1950) avers that perfect competition is not the best market structure and that ‘the large-scale establishment or unit of control’ is ‘the most powerful engine’ of progress. Since then, many theoretical and empirical studies have explored the relationship between market structure and innovation. The Schumpeterian endogenous growth models pioneered by Aghion and Howitt (1992) formalize Schumpeter’s argument. Their original model (see Aghion & Howitt, 1992) predicts a negative monotone relationship between competition and innovation. The reason is that if innovation is driven by the expectation of higher profits, then any increase in competition (that lowers profits) will reduce innovation.” [Links added.]
  • What, then, are the relationships between competition and innovation in health care delivery and health insurance? It’s presumed by Salam, Epstein, and Hyman above to be the case that lighter regulation and more competition in health care will increase innovation. But is that so, or could the relationship be more like the one found by Hashmi in U.S. manufacturing? (I’m asking. I don’t know. Has it been directly studied? If not, could it? How?)
  • If competition and lighter regulation does increase innovation in health care, does it necessarily or only increase innovation that is of benefit to consumers? One can imagine all manner of innovations that are of benefit to insurers or providers, but not necessarily consumers (or all consumers). Medical underwriting is but one example.

Comments on this post are open until one week from the date of this post. I’m seeking thoughtful, evidence-based responses and/or links to anything of relevance. Submissions will be moderated accordingly.

@afrakt

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