Role of Medicare Policy in Innovation Diffusion

Abstract

This study examines whether Medicare reimbursement schemes play a critical role in addressing market failures, particularly the slow adoption of innovative and consumer-beneficial technologies. Additionally, it proposes policy interventions to accelerate adoption rates. Using the case of Transcatheter Aortic Valve Replacement (TAVR), an initially costly procedure where Medicare adjusted hospital reimbursements later than physician payments, we analyze the rate and pattern of adoption. Empirically, we find that 70% of adopted by 2020 hospitals adopted TAVR before the reimbursement change, suggesting that factors beyond direct financial incentives influenced early adoption. The diffusion of TAVR does not follow the standard bell-shaped curve but instead exhibits distinct spikes in adoption — first year after the DRG code creation. To explain this pattern, we develop a structural model that accounts for cost reductions due to learning effects, anticipation of future Medicare reimbursement changes, and contractual relationships between hospitals and physicians. All this patterns are observed in the reduce form evidence. By separately identifying these key drivers of innovation adoption, our model allows us to simulate diffusion patterns under alternative Medicare reimbursement policies.