The Value of Innovation in the Medical Device Industry

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Abstract The United States relies on the $171 billion medical device industry to produce life-saving and life-improving innovations for millions of patients every year. While research shows medical device firms spend less on research and development (R&D) when they experience financial hardship, research has not established how those reductions in R&D affect patients’ access to new and clinically valuable technologies. This is due in part to a lack of firm-level measures that directly describe the development of life-saving and life-improving medical devices. To address these gaps, in this study I will 1) generate new firm-level measures of the clinical value of innovation in the device industry and 2) determine the effect of a change in a firm’s finances on their production of clinically valuable technology. To measure clinical value, I will use concepts from the cost-effectiveness analysis literature to examine how firms develop devices that extend and improve patients’ lives. The current standard measures of clinical value are incremental quality-adjusted life years (QALYs) and incremental cost effectiveness ratios (ICERs). QALYs measure a patient’s additional years of life weighted by the quality of those additional years of life, while ICERs compare those health gains to the cost of treatment. My study will also develop new “citation-weighted” measures of firm-level clinical value. The US Food and Drug Administration (FDA) approves most medical devices based on whether a new device is at least as safe and effective as a cited pre-existing device. My proposed citation-weighted measures will consider the QALYs and ICERs for a firm’s devices as well as the QALYs and ICERs of later devices that cite the given firm’s devices in their FDA applications. After creating my new “citation-weighted” measures of clinical innovation, I will determine how random “shocks” to firms’ finances affect their production of innovative devices by examining a natural experiment: hurricanes in Puerto Rico. Many device companies have production facilities spread out across Puerto Rico. Thus, hurricanes create a natural experiment in which some firms randomly experience larger increases in production costs compared to other firms due to the location of production facilities. Using this natural experiment will allow me to produce causal estimates of how changes in firms’ financial status affect their development of clinically valuable devices. Part of AHRQ’s stated mission is “to produce evidence to make health care safer, higher quality, more accessible, equitable, and affordable”. Medical device policy involves a fundamental trade-off between these goals. Governments can levy taxes or place more regulations on firms to promote higher quality or improved safety, but these policies may decrease patients’ access to future life-saving and life-improving innovations by increasing costs for manufacturers and slowing the development of new devices. My study estimates the trade-off between financial burden and clinical innovation, thereby allowing policymakers to evaluate how policies affect future generations’ access to life- saving and life-improving devices.