CBPP Senior Policy Scholar Yunan Ji Uncovers the Hidden Costs of Medicare Price Cuts on Innovation

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In a groundbreaking analysis featured in National Bureau of Economic Research (NBER)’s Working Paper Series, CBPP Senior Policy Scholar Yunan Ji, along with co-author Parker Rogers, reveals the unintended consequences of Medicare’s price reductions on the medical device industry. In their latest working paper, Ji and Rogers detail how aggressive price reductions in the medical device industry—reaching an average of 61%—led to a significant decrease in innovation, marked by a decline in new product introductions and new patent filings. Their study, spanning over 20 years of data on Durable Medical Equipment (DME) like oxygen concentrators and insulin pumps, found that these price cuts reduced new product introductions by 25% and patent filings by 75%.

Ji and Rogers’ research highlights a complex issue: while cost reductions in Medicare’s spending aimed to eliminate waste, they also spurred manufacturers to outsource production, resulting in higher product defect rates. The co-authors suggest that Medicare could better balance cost savings and innovation by strategically focusing cuts on product categories with higher profit margins, potentially preserving innovation and quality.

This work from CBPP’s Yunan Ji underscores a key insight for healthcare policymakers: without careful targeting, cost-containment measures can disrupt vital innovation in medical technology, impacting the future of patient care and technological advancement.

Read the full article here: https://www.nber.org/papers/w33083