Stimulating Health Care Innovation

How do policymakers increase the speed of healthcare innovation in the US? A 2014 report by RAND gives five proposals which I list below with my own commentary.

  1. Enable more creativity in funding basic science. Increasing funding for basic science is a clear way to spur innovation. The opportunity cost of additional funding for science is other government programs that often have better short-term returns. However, few societal investments pay off in the long term like investments in science. RAND also proposes adopting the a funding model “used by the Howard Hughes Medical Institute, which funds scientists rather than
    projects…” This proposal would decrease the administrative burden on applicants and could target more funds to the most promising scientists. On the other hand, this policy would likely move research funds even more towards senior researchers, decrease the probability that junior researchers receive funding, and increase the cost of allocating funds incorrectly. Thus, the marginal payoff of this change is likely low.
  2. Offer prizes for inventions. Prizes for innovation is a good idea but of limited applicability. In cases where it is clear that innovation is needed, prizes can be highly useful. For instance, there is a clear need for an effective treatment for Ebola. Prizes could be useful here to spur innovation while lowering the marginal cost of the products near zero. On the other hand, much innovation occurs in unexpected medicine. No one has a clear idea of what the best ideas in digital health will be in 10 or 20 years. Thus, prizes for fast changing areas may reward innovations that quickly become obsolete.
  3. Buy out patents. In theory, buying out patents could create value to society. Pharmaceutical firms will charge a price not less than the estimated profits they would make over the lifetime of the patient. Society will benefit because the marginal cost of the innovation will fall to 0 and thus use of the product will increase above what would occur under monopoly prices. However, the true value of a patent is likely uncertain and pharmaceutical firms likely have more information about the true value of a product than the government. Thus, this policy will likely lead to the government systematically overpaying to buy out patents.
  4. Establish a public-interest investment fund. “The market rewards for inventing products that reduce spending are often too low to be attractive to private investors. A public-interest investment fund (PIIF) could finance such inventive efforts.” This approach could be beneficials but–RAND correctly worries–that this relies on government or quasi-government public-private partnerships to pick winners. Further, the government may have incentive to pick suboptimal treatments funded by the investment fund in order to receive a return on their investment even if superior products are available in the market.
  5. Expedite FDA reviews and approvals. Faster FDA reviews would certainly increase innovation. Lowering the cost to bring a product to market will improve innovation. This is especially important for digital medicine devices and smartphone diagnostic apps that the FDA is regulating.

Healthcare Economists’ Take

In summary, I believe the RAND propositions will have a small effect on innovation. Reducing barriers to entry by speeding up FDA review and increasing basic science fund would clearly improve innovation. Creating prizes, buying out patients, or creating a government investment fund would likely work in selected cases, but they will not have a major impact on innovation.


Steven Garber Susan M. Gates Emmett B. Keeler Mary E. Vaiana Andrew W. Mulcahy Christopher Lau Arthur L. Kellermann. Innovation in US Healthcare: Options to decrease spending and increase value. RAND 2014.

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