The federal government plays several different roles in the development and use of medical technology such as the artificial heart. It sponsors research and development related to the technology; it regulates the investigational use of medical technology (drugs, biologicals, and medical devices) with human subjects and allows only those products that have been evaluated as safe and effective to be introduced to the commercial market; and it makes coverage and reimbursement decisions for Medicare. This section examines the first of these roles.

Rationale for Federal Support of Research and Development

Although the support of private-sector research and development by the federal government has deep historical roots, only since the end of World War II has this support become a major government function. The immediate postwar rationale was provided by the successful application of science and technology to military purposes. Consequently, national security R&D, the development of nuclear energy for power generation, exploration of outer space, and the support of medical and basic scientific research dominated federal spending in the first two postwar decades. As the scale of federal R&D grew and as its purposes embraced domestic policy concerns, a relatively clear conceptual rationale emerged for the respective roles of the public and private sectors in the support of R&D, which has implications for MCSS development.

Theoretical Considerations

Economic theory provides the clearest expression of the rationale for federal support of R&D, predicated on the theory of market failure. Basically, this theory holds that in a perfectly competitive economy the private sector will systematically underinvest in research. The reasons to expect this underinvestment, as Arrow (1962) stated them, are that research is risky; unlike other resources, research is not consumed by use but generates increasing returns from use; and access to information (the result of research) can be restricted only to a limited extent. These features hold most clearly at the basic end of the research continuum and are less and less relevant as activity moves closer to application.

Market failure illustrates one aspect of the problem of externalities. Where the production of a good generates external benefits (social rates of return greater than private rates of return) to those who do not pay for it, private firms will underinvest in its production relative to a socially optimal

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