Paying for Progress: Innovation Diffusion Under Regulation

Abstract

This paper shows that in regulated healthcare markets, delayed reimbursement can improve hospital technology adoption by acting as a screening device. We study transcatheter aortic valve replacement (TAVR) from 2010–2020 and show that 20% of eventual adopters entered when per-case margins were negative, largely because TAVR served as a quality signal that attracted patients across hospital boundaries. A hospital-choice model shows that adoption reduced travel disutility by 22%, making patients willing to travel 29% farther to reach an adopting hospital. Early adoption therefore reveals low-cost hospitals, while non-adoption identifies financially constrained ones. In a dynamic adoption model, delayed reimbursement combined with targeted subsidies to these constrained hospitals outperforms immediate uniform reimbursement, making delay an informational instrument rather than merely a friction.