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November 18, 2009
Policy Analysis no. 654

Bending the Productivity Curve: Why America Leads the World in Medical Innovation

by Glen Whitman and Raymond Raad

Glen Whitman is an associate professor of economics at California State University, Northridge. Raymond Raad, M.D., M.P.H., is a resident in psychiatry at New York Presbyterian Hospital / Weill Cornell Medical Center.

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The health care issues commonly considered most important today — controlling costs and covering the uninsured — arguably should be regarded as secondary to innovation, inasmuch as a medical treatment must first be invented before its costs can be reduced and its use extended to everyone. To date, however, none of the most influential international comparisons have examined the contributions of various countries to the many advances that have improved the productivity of medicine over time. We hope this paper can help fill that void.

In three of the four general categories of innovation examined in this paper — basic science, diagnostics, and therapeutics — the United States has contributed more than any other country, and in some cases, more than all other countries combined. In the last category, business models, we lack the data to say whether the United States has been more or less innovative than other nations; innovation in this area appears weak across nations.

In general, Americans tend to receive more new treatments and pay more for them — a fact that is usually regarded as a fault of the American system. That interpretation, if not entirely wrong, is at least incomplete. Rapid adoption and extensive use of new treatments and technologies create an incentive to develop those techniques in the first place. When the United States subsidizes medical innovation, the whole world benefits. That is a virtue of the American system that is not reflected in comparative life expectancy and mortality statistics.

Policymakers should consider the impact of reform proposals on innovation. For example, proposals that increase spending on diagnostics and therapeutics could encourage such innovation. Expanding price controls, government health care programs, and health insurance regulation, on the other hand, could hinder America's ability to innovate.

Full text of Policy Analysis no. 654

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