The Long-Run Impacts of Regulated Price Cuts: Evidence from Medicare

Yunan Ji and Parker Rogers

No 33083, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate the effects of substantial Medicare price reductions in the medical device industry, which amounted to a 61% decrease over 10 years for certain device types. Analyzing over 20 years of administrative and proprietary data, we find these price cuts led to a 25% decline in new product introductions and a 75% decrease in patent filings, indicating significant reductions in innovation activity. Manufacturers decreased market entry and increased outsourcing to foreign producers, associated with higher rates of product defects. Our calculations suggest the value of lost innovation may fully offset the direct cost savings from the price cuts. We propose that better-targeted pricing reforms could mitigate these negative effects. These findings underscore the need to balance cost containment with incentives for innovation and quality in policy design.

JEL-codes: H51 I18 O31 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-hea and nep-reg
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