Are the private and public sectors substitutes or complements in promoting biomedical innovation? We explore the key economic drivers of public and private financing of medical research across diseases, by combining over twenty years of private sector clinical trials and projects funded by the National Institutes of Health (NIH), the world's largest biomedical research funder. Using supervised machine learning tools, we map trials and projects to their respective diseases. Our findings reveal that the private and public sectors act as imperfect substitutes. Specifically, the U.S. private sector is less likely to invest in research on diseases that predominantly affect Black Americans—even after accounting for demand and supply determinants of innovation such as disease burden, research opportunity, and potential market size. In contrast, NIH prioritizes these diseases but does not fully compensate for the private sector’s under-investment: on average, NIH funding offsets approximately 80% of the “missing” private sector trials, with significant variation across diseases. We emphasize the importance of policies that incentivize increased private sector investment in diseases disproportionately affecting minorities, as such efforts could significantly reduce existing racial disparities.

I provide novel evidence that physicians respond to changes in insurance reimbursement for in-office treatments, though responses vary and can be unexpected. To estimate physician elasticity to private insurance reimbursement, I exploit a plausibly exogenous regulatory change in Medicare payment. Specifically, I document how private reimbursement typically follows Medicare reimbursement (Clemens and Gottlieb, 2016; Chan and Dickstein, 2019) and use the estimated payer-specific relationship between the two prices to construct a valid instrument. My findings show that supply generally exhibits a positive slope—lower reimbursement reduces treatment provision. However, for certain discretionary treatments, the supply curve is negatively sloped. I provide suggestive evidence that physicians compensate for reduced reimbursement by increasing provision of these and related treatments that can be easily combined in single patient visits.

Idea: How do typical insurance payment schemes shape drug price competition and pharmaceutical innovation?