Pandemic could drive innovation in medical field

The current COVID-19 pandemic, the largest public health crisis in a century, threatens the health of people across the globe. The U.S. has had the most diagnosed cases – surpassing 6 million – and more than 180,000 deaths.

But six months into the pandemic, the U.S. still faces shortages of personal protective equipment for both frontline medical workers and the general public. There is also great need for widely available inexpensive, rapid tests; the infrastructure to administer them; and most importantly, safe, effective vaccines.

Governments play farreaching roles in health care. The U.S. Food and Drug Administration approves new treatments. Public and private insurance administrators determine what treatments to cover. The Medicare program sets prices that have effects across the heath care system. By determining if and when competitors can enter the market, the U.S. patent system shapes pharmaceutical prices, which impacts companies’ financial returns. The National Institutes of Health and the National Science Foundation allocate funding for both basic and applied medical research.

Taken together, the government has substantial influence on medical innovation. That’s because private industry requires well-defined quality standards and clear financial incentives to speed forward – performance depends critically on the government agencies that often make the rules and set the payments.

In my research as an economist, I investigate the effects of government insurance programs on patient care, pricing and innovation across the health system. My colleague Parker Rogers and I recently analyzed innovations in the design and manufacture of artificial limbs during the U.S. Civil War. The example resonates because wars, like pandemics, create dramatic, unanticipated needs for medical innovations.

With advances in weaponry, destructive Minié bullets and a lack of surgical experience among doctors, many Civil War soldiers with leg or arm wounds required amputation. Roughly 70,000 veterans who survived the bloody, four-year conflict lost limbs.

As disabled veterans returned home, the government launched the “Great Civil War Benefaction” to provide prostheses. Officials examined and certified inventors’ prototypes, and wounded veterans then chose from approved products, which the government then acquired at preset prices: $75 per leg and $50 per arm.

The program’s cost-conscious approach shaped inventors’ efforts, leading them to emphasize simplicity in design and low-cost production. While prosthetic arms and legs remained quite primitive by modern standards, inventors emphasized improvements in comfort and modest gains in functionality. In total, 87 patents for prostheses were granted from 1863 through 1867, compared with 15 new patents between 1858 and 1862.

Most research into the economics of medical innovation has focused on pharmaceuticals. This research has showcased the power of incentives.

For example, with the introduction of guidelines, mandates or other government policies that increased projected profits, vaccine development accelerated.

Additional evidence has shown that the introduction of Medicare’s drug benefit sped pharmaceutical research for diseases that impact the elderly. Diseases that offer robust or expanding drug markets receive particular attention. Economists have also found that drug development responds to incentives created by the patent system. Finally, when insurers begin to exclude drugs for a particular disease, R&D for that disease tends to slow.

During the COVID-19 pandemic the U.S. government has, unfortunately, not provided the sort of certainty required for medical innovation to flourish as well as it could. By creating uncertainty, the federal government discouraged both states and private companies from acting on their own initiative, which has delayed our national response.

So what is the best way forward for spurring private industry to fight the pandemic? To me it’s clear that the government has a straightforward role to play in setting the stage.

As a narrow example, governments can increase demand for masks by issuing clear guidance and informing the public. The resulting demand creates strong financial incentives for companies to innovate and expand production.

Further, the federal government can propel the development and distribution of tests and vaccines through “advance purchase commitments” that guarantee a market for newly approved products. The U.S. government has taken a major step in this direction by committing to purchase large quantities of COVID-19 vaccines upon approval.

While the science of medical innovation is difficult, policy is relatively simple: Set clear standards, establish clear incentives and let the scientists and entrepreneurs do their work.

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