Medicare and the Rise of American Medical Patenting: The Economics of User-Driven Innovation

Abstract

Innovation is part idea generation and part development. We build a model of “innovating-bydoing,” whereby ideas come to practitioners. Successful innovation requires that practitioners’
ideas be developed through costly effort. Our model nests existing theories of laboratory research
and learning-by-doing. Empirically, we analyze the effect of the U.S. Medicare program on
medical equipment innovation. Our model’s structure allows us to infer the Medicare program’s
aggregate effects. We estimate that Medicare’s introduction led to a 20 to 30 percent increase in
medical equipment patenting across the United States, of which roughly half is due to the
innovating-by-doing channel.

JEL Classification: I130, O380, O310, H510