Promoting Healthcare Innovation on the Demand Side

Innovation policy often focuses on the incentives of firms that sell new products. But optimal use of healthcare products also requires good information about the likely effects of products in different patients, and it is hard to provide the right incentives for producers to develop and disclose information that could limit future sales. Regulation partially fills this gap by requiring sellers to conduct clinical trials and report adverse events. But it is inherently problematic to rely on producers to supply negative information about their own products. Healthcare payers, however, can profit from avoiding inappropriate use of costly technologies. Recent technological advances enable insurers to innovate by analyzing their data about healthcare provision and outcomes. The federal government seeks to promote this sort of innovation through a series of initiatives; some picture insurers as passive data repositories, while others provide opportunities for insurers to innovate more directly. In this paper, we examine the role of health insurers in developing new knowledge about the provision of quality 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 legal rules surrounding privacy and their effects on this research, and consider the effect of market structures and intellectual property rules on incentives for demand-side innovation. Throughout, we highlight the multi-pronged way that government facilitates payer innovation, apart from the traditional tools of innovation policy