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The Economics of Medical Procedure Innovation


Unlike drugs, medical procedures are subject to complex medical coding systems that are designed to make reimbursement feasible for the diverse range of procedures that providers can perform. Decisions about changes to the coding system are administrative. That is, unlike the regulatory decisions of the FDA, coding decisions are not intended to change utilization. The AMA, which monitors the widely used CPT code set, is clear that its decisions about CPT codes do not represent endorsements of individual procedures. Instead, coding decisions are made based on factors such as existing use and interactions with existing codes, consistent with the claim that new codes are approved to simplify reimbursement administration, not to change provider behavior. Despite this, provider and payer interpretations of code sets and the central role that code sets play in reimbursement make it possible that changes to a code set do affect use. If this is true, then studies of the innovation and adoption processes for new medical procedures should consider both administrative processes and traditional regulatory processes when describing the timelines and incentives for innovation. Studying the effect of code changes on use is generally challenging because medical codes provide the mechanism by which utilization is observed in administrative data. Utilization, as measured by a new code, will necessarily increase when the code is introduced, because there was no way to separately identify the procedure before it had a unique code. We use CPT code application documentation from the AMA to address this challenge. The AMA assigns temporary CPT III codes to some new procedures before those procedures are (possibly) promoted to permanent CPT I codes. Using the AMA documentation, we link CPT III and CPT I codes for new procedures, allowing us to observe procedure use before and after receiving a CPT I code. We find evidence that promotion to a CPT I code from a CPT III code has a large, positive effect on new procedure use. This effect is robust to alternative specifications and different assumptions about censored data. The results are consistent with qualitative evidence from payers and medical device manufacturers. Our results suggest that models of drug innovation, where the major hurdles to commercialization are patent protection and FDA approval, are not appropriate for analyzing medical procedure innovation. Instead, the integration of new procedures into the administrative framework of healthcare can potentially delay or accelerate diffusion. This has implications for the incentives facing medical device manufacturers, physicians and other developers of new procedures. In addition, layers of complex administrative rules are common in modern healthcare. Extant literature has demonstrated the potential for reimbursement rules to change provider decision-making (Sonchak 2015; Carroll et al. 2018; Aouad et al. 2019). Our results suggest that administrative processes that are not directly linked to use or reimbursement can nonetheless affect the care that is delivered. There may be other administrative rules that change healthcare decisions in unanticipated ways.


Working Paper


David Dranove, Craig Garthwaite, Chris Heard, Bingxiao Wu

Date Published



Dranove, David, Craig Garthwaite, Chris Heard, and Bingxiao Wu. 2020. The Economics of Medical Procedure Innovation.


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