February 03, 2012
Study: Hospitals Overpay for Devices
Some hospitals pay thousands of dollars more than others for big-ticket medical devices such as defibrillators and hip replacements, and a portion of the higher costs could be passed on to the federal Medicare program, a new government report says.
Among 31 hospitals surveyed by investigators for the Government Accountability Office, one paid $8,723 more than another for an identical model of a device that regulates heart rhythm. The device, called an implantable cardioverter defibrillator, typically costs the hospitals between $16,445 and $19,007.
In another finding, prices paid for the same drug-eluting stents, used to prop open diseased blood vessels, varied by as much as $828 from their typical cost of $1,700 to $1,800.
Such price variations often result from confidential negotiations between hospitals and devices makers, hospital officials say. They could affect Medicare spending because the program sets hospital payments based in part on the costs the hospitals incur, the report says.
Medicare, which insures seniors and disabled people, spent $19.8 billion on procedures involving implantable devices in 2009, up from $16.1 billion in 2004.
The report "raises serious concerns over the prices hospitals and Medicare are forced to pay for implantable medical devices," Senate Finance Committee Chairman Max Baucus said in a statement. The Montana Democrat requested the GAO study.
The report, due out Friday, doesn't attempt to estimate the additional costs, if any, such price discrepancies add to the Medicare bill. But Mr. Baucus, whose office provided the report to The Wall Street Journal, said the lack of clear pricing information makes it harder to cut the cost of health care.
Device makers say their products represent only a sliver of the $2.8 trillion in annual health spending and that greater savings could be found elsewhere. A 2011 report sponsored by the Advanced Medical Technology Association, a trade group for device makers, found that spending on a wide range of devices and nondrug supplies, a category that ranges from pacemakers to hospital beds, hovered between 5% and 6% of total health spending from 1989 to 2009.
"We're not seeing the problem," said David Nexon, an executive vice president of the device association. Confidential price agreements are routine in other industries, he said, and price transparency could increase costs by discouraging sellers from offering discounts.
Hospitals long have struggled to control costs for implantable devices in part because physicians typically choose which product to use while hospitals, patients and insurers foot the bill, hospital executives say.
Because hospitals depend on doctors for patient referrals and revenue, they often bow to the demands of physicians who may prefer, for instance, a defibrillator made by a particular manufacturer to one from another, regardless of price.
The GAO report highlighted that problem, and said contracts between manufacturers and hospitals often forbid disclosure of prices even to doctors, making it harder to steer doctors to less expensive options. In some cases, the report said, hospitals bound by such contracts resorted to using color-coded stickers to help doctors distinguish between cheaper or more expensive devices on stock shelves.
While doctors' preferences for devices can complicate hospital negotiations with device makers, the balance of power is shifting to hospitals. One reason is that hospitals increasingly employ doctors directly, giving them incentives to save money for their bosses. For instance, the number of orthopedic surgeons—heavy users of implantable devices—employed by hospitals has doubled to 8% of active surgeons since 2006, according to a survey by the American Academy of Orthopedic Surgeons.
"The hospitals in the past were reluctant to intervene in something the surgeons thought was important to their practice," said Paul Mango, a McKinsey consultant. Employing doctors means hospitals can share prices with them, give them bonuses for saving money, and reduce the influence of device sales representatives, he said.
In 2010, the Cleveland Clinic, where many doctors are on staff, tasked vascular surgeon Sean Lyden with extracting $100 million in costs from the health system's supply chain by 2012.
"I've never told a physician what they can use or not, but we educate them on a monthly basis about what things cost," Dr. Lyden said. The tactic has helped meet the savings goals.
Device makers say they are responding to increasingly sophisticated hospital buyers. Companies such as Medtronic Inc. historically focused their sales pitches on doctors. But now, the company is telling investors that it is increasingly focused on addressing hospitals costs.
"If the hospitals are not successful, we won't be successful," Medtronic Chief Executive Omar Ishrak said in a recent interview.