Market for medical equipment, health spending likely to change as ACA expands, economist says

Medical equipment patents in the U.S.—and health spending—increased with the nation's public expansion of health insurance in the mid-1960s, a new research paper says.

But that may not happen again as millions of Americans get new coverage under the healthcare reform law, according to the paper's author, Jeffrey Clemens, an assistant professor of economics at the University of California San Diego.

That's because the market that fostered new patents (with higher price tags) after the creation of Medicaid and, more importantly, Medicare, is not the same marketplace as what's likely to emerge from the Patient Protection and Affordable Care Act, Clemens said.

The coverage expansion that begins Jan. 1 is similar in one way to that historical analogue. With more insurance coverage, more households will pay less for medical care. Medicaid, the safety net insurance for the poor, and Medicare, federally funded insurance for the elderly and disabled, slashed the cost of hospital or clinic visits for patients who were previously uninsured and paid medical bills from their own pockets. Households paid 35 cents of every dollar spent for hospital and physician care in 1960, Clemens reports. By 2005, it was 5 cents.

What households spend “out-of-pocket” is also expected to drop for those who gain insurance under the Affordable Care Act. (Out-of-pocket spending is projected to drop 1.5% next year after an increase of 2.7% this year and 4.1% in 2012.)

This creates a potential consumer market for new medical equipment. But that market also depends on how well insurance pays for doctors to use medical equipment and what incentives exist for innovation, Clemens said in an interview.

Medicare—which insured 49.4 million this year—encouraged both the use and development of new technology, he said, because it paid by volume and cost. That gave doctors an incentive to do as much as possible, and innovators didn't have to worry about the price of new developments.

New patents flourished in areas such as surgery, where the doctors who use medical equipment might develop or influence new designs, Clemens wrote. U.S. medical equipment patents outpaced development abroad and other domestic innovation by 40% to 50% after the introduction of Medicare and Medicaid, he found. That also added an estimated 15% to U.S. health spending in hospitals and clinics.

But Medicaid did less to foster innovation because of its less-generous payments. And the upcoming expansion relies in part on an increase in Medicaid enrollment.

The incentive for innovation under Medicaid will depend on how physician-entrepreneurs respond where Medicaid both expands and operates under managed-care contracts.

Not all states opted to expand Medicaid under the health reform law. However, Medicaid managed care has grown increasingly common. Two-thirds of Medicaid enrollees were covered by a managed-care plan as of 2012, according to the Henry J. Kaiser Family Foundation. Managed care, unlike models that reimburse providers for each procedure, test or visit, known as fee-for-service, typically pays a lump sum per patient. Doctors have an incentive to treat patients as efficiently as possible to hold costs below the lump sum amount because doctors keep the difference.

That could encourage productivity-boosting, cost-saving innovation because, as Clemens put it, managed care “pays for cost effectiveness.”

Others will gain insurance in the private market through the Affordable Care Act's new marketplaces. Again, innovation will depend on how much and how these marketplace plans pay doctors, and that remains largely uncertain. Generous fee-for-service plans could incentivize innovation that increases both quality and cost, he said. Stingy fee-for-service may yield no innovation incentive at all. But payments with an incentive for efficiency, such as managed care, could promote more cost-effective innovation.

The 2010 law also introduced some experiments with Medicare reimbursement, such as accountable care, that could promote cost-saving innovation. Clemens said it's too early to judge their impact.

Follow Melanie Evans on Twitter: @MHmevans