The Economics of Medical Procedure Innovation (WP-21-49)
David Dranove, Craig Garthwaite, Christopher Heard, and Bingxiao WuThis paper explores the economic incentives for medical procedure innovation. Using a proprietary dataset on billing code applications for emerging medical procedures, the researchers highlight two mechanisms that could hinder innovation. First, the administrative hurdle of securing permanent, reimbursable billing codes substantially delays innovation diffusion. The authors 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% 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. The researchers 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.