Analyzes the development process leading to new medical technology. The supply side of the medical technology market is outlined, with attention to technical change in medicine, the innovative process, and incentives operating on service providers that influence the development and marketing of new technology. Important characteristics of the marketplace are uninformed consumers, third-party reimbursement, defensive medicine, nonprice competition among hospitals, and the growing regulatory constraints on suppliers and providers. Public policy areas affected by and in turn affecting the development of medical technology are research and development, reimbursement and services, and regulation. Areas of needed research include: descriptive "micro" studies of ongoing R&D in the public and private sectors; investigation of influences on product development (including lack of incentives for cost-reducing technology); methods for ascertaining efficacy and safety; and analysis of governmental effects on the innovation process.