Economists have frequently pointed to the distorting effects of health insurance as a major contributor to rapidly increasing health costs. Relatively little is known, however, about the influence of changing medical technology on expenditures. If increases in expenditures are in part the result of development of costly but worthwhile new technologies (a common view among noneconomists), failure to take account of this may lead to over-statement of the distortive effects of insurance. On the other hand some observers have questioned whether the benefits derived from expensive medical innovations always exceed the costs [18]. Others have suggested that resources devoted to the development of very expensive technologies might be better used for other kinds of medical research [16; 3]. In light of these arguments, it appears that the relationships between medical insurance and technological change may be quite important. If the extent of insurance coverage influences the rate and direction of technological change in medicine, then the long run welfare effects of insurance are more complex than current models [5; 6] allow. It is sometimes argued informally that such an influence existsthat the presence of insurance biases the system toward innovations that expand capabilities while increasing expenditures, and away from those that reduce costs [15; 20]. Such a hypothesis has, however, never been developed as an implication of a formal economic model.' Even the term bias in the argument is unclear; it appears to be used in a normative sense, but it has not been explained clearly why such a bias, if it exists, leads to welfare losses. Even if it is true, for example, that the presence of insurance leads to the adoption of a more costly mix of medical innovations than would otherwise occur, this is not obviously undesirable. To facilitate the purchase of costly but beneficial medical care is the purpose of insurance. This paper defines bias in technological change in a normative sense. It employs a simple model of insurance and profit maximizing innovators, and develops sufficient