Payment System (PPS) for Medicare based on diagnosis-related groups (DRGs), the rapid growth in health maintenance organizations (HMOs) and preferred provider organizations (PPOs), and the creation of a resource-based relative value scale (RBRVS) for physician services. These policy changes create very different incentives for providers to adopt and use medical technology. Less apparent, but also very important, they exert a strong indirect influence on investment in research and development (R&D).

In addition to payment, a wide range of public policies has evolved that foster or inhibit innovation. These policies attempt to accomplish a variety of different public goals (4). For example, policies to encourage a high level of public and private R&D include the federal support of biomedical research, tax credits, and legislation to protect intellectual property. Pre-marketing approval regulation of new health care products and liability statutes aim to prevent the diffusion of unsafe or inefficacious technologies. Trade policies attempt to encourage health-related exports, whereas anti-trust legislation intends to encourage competition.

Recently, concerns have been raised that various combinations of these policies may have unanticipated—and perhaps unwanted—effects on technological innovation in medicine. The main objective of this volume is to address these concerns and consider the complex interplay between innovation and public policy. The term “innovation,” in this context, refers to the development and introduction of new drugs, devices, and surgical procedures into clinical practice. Surgical procedures are included as an example of clinical procedures whose development does not necessarily depend on new health care products and may not involve the pharmaceutical or device industry. Within the broad range of policies that affect innovation, this volume focuses on the impact of United States regulatory and payment policies. In the final chapters, the policy environment for industrial innovation in the United States is compared with that in Europe and Japan.

A DYNAMIC MODEL OF TECHNOLOGICAL INNOVATION IN MEDICINE

Before we address the main theme of this volume, it seems useful to examine briefly the nature and dynamics of technological innovation. The increasing reliance of technology upon science during the twentieth century has given rise to a “linear model” of technological innovation, in which results were perceived to flow from basic research to applied research, product development, manufacturing and marketing, adoption, and use (see Figure 1.1 ). This is a supply-oriented model in which the critical need is assumed to be the provision of adequate funding for biomedical research. This model, however, has a number of theoretical and practical limitations. One of the more important limitations, from the perspective of this book, is



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