Innovation in health care requires new ideas and the capital to develop and commercialize those ideas into products or services. The necessary capital is often "venture capital," but the link between public policy and the venture capital industry has not been well examined. In this paper we explore the link between venture capital and innovation in health care, and we present new descriptive data from a survey of health care venture capital fund managers. Respondents generally viewed policy levers (for example, reimbursement and regulations) as important risks to venture capital investments, potentially affecting their ability to raise capital for early-stage investment funds. [Health Affairs 28, no. 1 (2009) M e d i c a l a dva n c e m e n t through research and development in prescription drugs, devices, and services has had a dramatic impact on health care in the United States. Innovation has shifted surgical procedures from highly to minimally invasive, moved therapies from late-stage treatment to early treatment and prevention, and created treatments for previously incurable diseases. 1 The growing burden of disease in the United States and worldwide suggests that the need for innovation will remain high.Innovation in health care requires new ideas and the capital to develop those ideas into marketable products. Increasingly, innovation occurs in small, early-stage companies that rely heavily on venture capital. 2 After a product reaches a certain stage of development, these small companies are frequently acquired by larger companies to complete the development, production, and marketing of products. 3 This is particularly the case in the pharmaceutical industry, in which larger companies look to start-up companies to supplement their product pipelines. 4 It has been estimated that 17.5 percent of sales from the twenty largest pharmaceutical companies in w 6 8 2 D e c e m b e r 2 0 0 8 2002 was derived from in-licensed products and that this proportion would increase to 26.1 percent in 2010. 5 Thus, venture capital funds play a critical role in providing early-stage financing to bring technologies past the financial "valley of death," to the point at which they become attractive to a wider spectrum of investors, including larger pharmaceutical companies and even the public through initial public offerings (IPOs). 6 The positive impact of venture capital funding on innovation can be dramatic. 7 Venture capital is a large source of financing for developing new ideas into health care products (more than $10 billion in 2007 alone). 8 One dollar of venture capital is about three times more effective in producing patentable ideas than a dollar spent on traditional corporate research and development (R&D). 9 Because the health sector is unique in the sheer volume and magnitude of risks facing companies (regulatory, reimbursement, liability, and so on), changes in policy-induced risk can be expected to affect both the ability of fund managers to raise capital and the types of health care investments made...

The 1983 Orphan Drug Act created incentives for the development of orphan drugs. Despite its successes, including a substantial increase in new drugs, approved orphan drugs still treat fewer than 5 percent of registered rare diseases. In addition, concerns have arisen about the high prices of many of these therapies, which can cost hundreds of thousands of dollars per patient each year. In this article, we propose a new "grant-and-access pathway," in which drug developers could opt to compete for federal grants to subsidize the costs of clinical testing. In return for the grant funding, companies would no longer claim orphan drug tax credits and would agree to price caps for marketed products based on the duration and costs associated with drug development, expected market size, and target rate of return. We identify scenarios in which such a policy could provide a net benefit to society.