Promoting healthcare innovation on the demand side

Innovation policy often focuses on fortifying the incentives of firms that develop and sell new products by offering them lucrative rights to exclude competitors from the market. Regulators also rely on these same firms—and on similar incentives—to develop information about the effects of their products in patients, despite their obvious conflict of interest. The result may be a distorted understanding that leads to overuse of expensive new medical technologies. Recent technological advances have put healthcare payers in an excellent position to play a larger role in future innovation to improve healthcare and reduce its costs. Insurance companies and integrated healthcare providers have custody of treasure troves of data about healthcare provision and outcomes that can yield valuable insights about the effects of medical treatment without the need to conduct costly clinical trials. Some integrated healthcare systems have seized upon this advantage to make notable discoveries about the effects of particular products that have changed the standard of care. Moreover, to the extent that healthcare payers can profit from reducing costs, they will seek to avoid inappropriate use of costly technologies. Greater involvement of payers in healthcare innovation thus offers a potential counterweight to the incentives of product sellers to promote excessive use of costly new products. In recent years, the federal government has sought to promote innovation through analysis of healthcare records in a series of initiatives; some picture insurers as passive data repositories, while others provide opportunities for insurers to take a more active role in innovation. In this paper, we examine the role of health insurers in developing new knowledge about the provision and effects of healthcare—what we call ‘demand-side innovation’. We address the contours of this underexplored area of innovation and describe the behavior of participating firms. We examine the effects of current legal rules on demand-side innovation, including insurance regulation, intellectual property rules, privacy protections, and FDA regulation of new healthcare technologies. Throughout, we highlight many policy tools that government can use and is using to facilitate payer innovation outside the traditional toolkit of patents and exclusive rights.