Can Too Much Sunshine Harm Innovation?

To survive, young firms have to weather all kinds of change — including rapid shifts in personnel, strategy and business models. But what happens when state lawmakers radically change the rules for doing business?

That’s one of the questions Jiang Bian is trying to answer. Bian, a PhD student in Stanford University’s Department of Management Science and Engineering who is studying with STVP, investigates how early-stage companies react to changes in their regulatory environments.

In particular, Bian is focused on the medical device industry, which has been transformed by the passage of so-called “sunshine laws” in several states.

Sunshine laws aim to limit dangerous financial conflicts of interest in medical care. It’s a valid concern: If your doctor recommends a particular drug or procedure, you want to be sure it’s because they really believe it’s best for your health — and not because, say, the pharmaceutical or device company paid them thousands of dollars to speak at a conference.

Between 2005 and 2010, five states — California, Nevada, Massachusetts, Vermont and Connecticut — passed laws requiring greater transparency about medical device firms’ payments to doctors, nurses and other medical personnel. Massachusetts, for instance, requires public disclosure of any transaction over $50.

But Bian has found that these well-intentioned rules have inadvertently limited research partnerships between doctors and private industry — partnerships that may promote innovation, and lead to the development of life-saving devices.

When regulation and innovation collide

When Bian arrived at Stanford, her advisor Riitta Katila — research co-director at STVP — was already studying the medical device industry. In one paper, Katila looked at how the participation of MDs impacted the performance of surgical device ventures. It turned out that firms were more innovative when doctors served in technical or governance roles, but not when MDs became CEOs.

Katila’s research helped Bian realize that the medical device industry might be an ideal context to explore another aspect of innovation: how it is helped or hindered by regulation.

In the medical device field, interactions between companies and doctors are “quite controversial due to the vulnerability to conflicts of interest,” Bian says. That vulnerability is why state lawmakers began proposing sunshine laws. The laws were, for the most part, intended to provide greater transparency about interactions between doctors and firms’ sales and marketing teams. But Bian suspected there might be an accidental spillover effect. Did sunshine laws prevent doctors from getting involved in the research and development process for new devices?

Bian took advantage of a natural experiment: Because only some states adopted sunshine laws, she could compare physician-firm R&D partnerships in states with and without the laws. First, though, she had to sift through mountains of data. Bian started by identifying roughly 700 US-based, venture capital-backed medical device firms founded between 1996 and 2010, the period during which states proposed and later adopted sunshine laws.

Then, she used all the publicly available information she could get her hands on — patent filings, FDA product approvals and physician directories from the American Medical Association as well as other sources — to figure out whether any doctors had been involved in the R&D process in those firms.

“The verification process was kind of painstaking,” Bian says. And through it all, there was never certainty that she would find anything interesting in the data.

Sunshine laws reduce R&D collaboration — but not for everyone

Fortunately, Bian’s months of careful analysis paid off. The data proved that her initial hypothesis was correct: States that passed sunshine laws did see a reduction in the level of R&D collaboration between doctors and private industry. But that reduction wasn’t uniform among all firms. “The impact was much more pronounced for those without doctor founders,” Bian says.

What’s driving firms to stop collaborating with doctors? After all, sunshine laws don’t prevent payments to MDs — they simply mandate transparency. Bian thinks that the simple fact of having to say you paid a doctor for their services can provoke legitimacy concerns for firms — the fear that stakeholders will mistrust the company or product. “Young firms may be concerned about being perceived as illegitimate if they have financial ties to doctors,” she explains.

Legitimacy concerns also might explain why doctor-founded firms were less affected than others by sunshine laws. “Doctor founders ‘speak the same language’ as other doctor collaborators, and their firms (and subsequently their partnerships) were probably perceived as more trustworthy in the eyes of these peers,” she suggests.

For Bian, the takeaway from this research isn’t that sunshine laws are necessarily bad or good. Rather, she wants people to understand that well-meaning rules intended to limit one type of behavior can spill over into other areas — particularly when the regulations impact professional partnerships.

States aiming to promote collaboration between scientific professionals and emerging companies, for example, may want to carefully target their regulations, taking into account how regulations might disincentivize collaborations between companies and the doctors and scientists who both understand and use the technologies in question.

And for their part, firms should be mindful that pulling back from collaborations with professional users like doctors may curb short-term worries about illegitimacy, but could come at a long-term cost to the company’s growth.

Visit the STVP Research page to learn more about the STVP PhD program, which focuses on entrepreneurial policy, business strategy and innovation in technology-driven markets.