The Returns to Medical Inventions

Medical innovation is perhaps the most important driver of health spending and quality. Economists have studied pharmaceutical innovation for decades, and their findings have contributed to the policy debate about optimal FDA policy. Despite its importance to healthcare spending and value, there is no similar literature upon which to build an optimal regulation system for novel and valuable medical procedures. In this paper we begin to fill this gap by documenting both the incentives for developing medical procedures and process through which they are approved for use. Drawing on the work of Sam Peltzman and George Stigler, we argue that the largely ad hoc system of rewards and review for medical procedures may explain the apparently slow pace of innovation, particularly when compared with drug innovation.