Containing the costs of health care can be useful to government, employer, and household budgets, but it may have a detrimental impact on innovation, since health care costs are the main source of revenue for medical innovators. Developers seek profits and so are attracted to industries and innovate where they believe profits can be made. Policies that reduce health care costs and, in turn, developer’s profits may have a dampening impact on innovation. This creates the challenge of how to curb health care spending while continuing to enjoy the improvements in quality and quantity of life that result from innovation in medical care. This paper explores the economics literature on cost containment and health care innovation, with most of the focus on pharmaceutical innovation.