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

I study the effect of health insurance expansions on medical innovation.  Innovation by practitioners creates important roles for local patient flows and payment systems as drivers of medical technology development.  I show that, over the 15 years following Medicare and Medicaid's passage, U.S.-based medical-equipment patenting rose by nearly 50 percent relative to both other U.S. patenting and foreign medical-equipment patenting.  Surges in medical-equipment patenting were largest in the states most directly affected by the Great Society programs.  Evidence on the importance of patient flows highlights that innovation's economic determinants extend beyond the potential profits associated with market size.  As a placebo test, I show that there was no relative increase in U.S.-based pharmaceutical patenting, for which Medicare did not directly affect markets.  The dynamic effect of U.S. insurance expansions may account for 25 percent of recent 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.