In the Public Eye

Government report on pricing confidentiality stirs the pot, causing some to question well-worn pricing techniques.

Greg Wieder won’t sign ’em. “We won’t do business with a company that insists on that.” But others will, figuring they can still find ways to access pricing databases and share pricing info with their surgeons and other clinicians. Meanwhile, vendors appear to keep pressing the issue, although some are of the opinion that in today’s information-rich society, it’s pointless to try to keep pricing behind the curtain.

“I don’t see how I can keep pricing confidential anyway,” says Wieder, director of materials management at Wentworth-Douglass Hospital in Dover, N.H. Insurers are demanding it, surgeons are demanding it, even patients are demanding it.

In the public eye
Confidentiality clauses are back in the public eye, thanks in large part to a federal government report published in January, which blamed such clauses for huge variations in hospital prices. What remains to be seen is whether the attention will garner more than a couple of TV news blurbs.

The report, which was requested by U.S. Senator Max Baucus, a Montana Democrat who chairs the Senate Finance Committee, found that “substantial variation” exists in the prices hospitals pay for the items studied – total knee implants, primary total hip implants, coronary drug-eluting stents, automated implantable cardioverter defibrillators, and cardiac resynchronization therapy defibrillators.

“This report makes clear that too little information is available about the costs of implantable devices,” said Baucus, in a statement following the release of the report. “It raises serious concerns over the prices hospitals and Medicare are forced to pay for implantable medical devices. Until we find a meaningful way to report prices that helps contain rising costs, this problem will only grow.

“The lack of available data makes it extremely difficult for Medicare and hospitals to get a full sense of the cost problem. We simply have to find smart ways to curb rising costs, preserve quality care and save taxpayer dollars, and getting more information about the cost of implanted medical devices is a strong first step. One solution could be for hospitals that treat Medicare beneficiaries to report and share device pricing information with the Centers for Medicare and Medicaid Services.”

Lawsuits
Confidentiality agreements have been a fact of life for contracting executives for years, particularly with physician-preference items. But they flared into the public consciousness eight years ago.

In August 2004, Guidant Corp. (now Boston Scientific) filed a lawsuit against Aspen Healthcare Metrics, a MedAssets company, on the grounds that prices paid by hospitals for Guidant’s cardiac rhythm devices were confidential, that hospitals do not own such data, and that Aspen had no right to collect or disseminate it. Aspen responded that Guidant’s pricing information was readily available within the industry and in certain industry publications, and that physicians could obtain Guidant cardiac-rhythm-management pricing even when they were not employed by the hospital or subject to confidentiality agreements with Guidant. In May 2006, the two companies reached a settlement, the terms of which were confidential.

Also in May of that year, ECRI Institute, which has published its PriceGuide pricing database since 1996, filed suit against Guidant, asserting its right to continue publishing pricing data collected from hospitals. Speaking at the time, ECRI President and CEO Jeffrey Lerner, Ph.D., called it a First Amendment issue. The two sides settled in November 2007. Once again, the terms were confidential.

At the time, the confidentiality/transparency issue was so hot that Senators Charles Grassley and Arlen Spector introduced “The Transparency in Medical Device Pricing Act” in October 2007, which would have required device manufacturers to report the average and median sales prices for implantable devices on a quarterly basis as a condition of participation in Medicare, Medicaid or the State Children’s Health Insurance Program. The legislation went nowhere.

Today, confidentiality clauses remain part of the healthcare contracting process, according to those with whom the Journal of Healthcare Contracting spoke.

“They’re very pervasive,” says Joseph Volpe, vice president, supply chain, Wheaton Franciscan Healthcare, Glendale, Wis. “They’re part of just about every contract we see.” Volpe believes vendors ramped up their insistence on confidentiality following the ECRI and Aspen lawsuits. “Everybody interpreted those suits as Guidant winning,” he says.

Granted, confidentiality clauses in contracts for general commodity-type contracts are waning, says Volpe. He believes that the economic slowdown has cooled vendors’ insistence on them. “They may put the clauses in, but many will accept modifications that will take some of the teeth out of them,” he says. That said, vendors of physician-preference items are still adamant that confidentiality clauses remain intact.

Why is the government interested?
Though Medicare does not directly pay hospitals for implantable devices, the agency uses data from cost reports and claims to help it establish prospective payment rates. It was the rapid climb in costs for implant-related procedures that drew the attention of the feds last year, prompting the U.S. Government Accountability Office (GAO) investigation.

From 2004 through 2009, Medicare expenditures for such procedures increased from about $16 billion to $20 billion, reported the GAO. “While cardiac and orthopedic procedures accounted for nearly all [implantable-medical-device-] related expenditures, orthopedic procedures accounted for most of the increase in such expenditures during our period of study. A substantial portion of this amount may be attributable to the cost of the devices themselves, but exactly how much is unknown, in part, because hospitals purchase the IMDs and Medicare does not track IMD prices or how much individual hospitals pay for them.”

Among the 31 hospitals that submitted data to the GAO, the difference between the lowest and highest price reported for a particular automated implantable cardioverter defibrillator (AICD) model was $6,844. The difference between the highest and lowest price reported for another AICD model was $8,723. The median prices across the four AICD models ranged from $16,445 to $19,007.

It was more difficult to compare prices for orthopedic implantable devices because of the greater variation among device configurations, said the report’s authors. “However, the data on orthopedic implants reported by hospitals and GPOs – which may not capture all discounts and rebates – provided some evidence of substantial price variation.” For instance, one hospital reported spending about $4,500 for a specific primary total hip construct in 2010. In comparison, a GPO provided information showing that one of its members paid about $8,000 for the same device construct, or 78 percent more. Similarly, a GPO provided data on two of its member hospitals that purchased the same primary total knee construct. One hospital paid about $5,200, while the other paid about $9,500, or 83 percent more.

Why the variation? The GAO suggested three reasons:

  • Physician preference. “Physicians, though typically not involved in price negotiations, often express strong preferences for certain manufacturers and models of implantable medical devices.”
  • Lack of volume discounts. “To the extent that physicians insist on using the device of their choice, the hospital misses opportunities to obtain volume discounts from manufacturers.”
  • Confidentiality clauses. “Confidentiality clauses barring hospitals from sharing price information make it difficult to inform physicians about device costs and thereby influence their preferences.”

GPOs react
“The GAO report confirms what GPOs, hospitals, long-term-care providers, and anyone on the front lines of patient care and healthcare cost-containment see every day,” said Healthcare Supply Chain Association President Curtis Rooney in a statement. “Medical device pricing secrecy decreases competition, limits the ability of hospitals and their GPO partners to effectively negotiate for medical products and services, and artificially drives up healthcare costs, leaving hospitals, Medicare and American taxpayers to foot the bill.

“The $200 billion medical device industry is able to leverage its army of salespeople to drive unnecessary utilization and further enforce contractual ‘gag clauses’ to keep prices a secret, which gives device makers a virtually unchecked ability to drive up costs for hospitals and Medicare,” continued Rooney.

“Because hospitals are unable to discuss price with the physicians who typically choose which products to use, hospitals have become third party payers.”

Baucus, who requested the report as part of an ongoing effort to identify opportunities for savings in federal health programs, said the next step should be to find a way to increase transparency, which, he believes, would help contain costs and preserve high-quality care.

Are confidentiality clauses to blame?
Device manufacturers deny that confidentiality clauses lead to price hikes. Those interviewed by the GAO noted that several factors influence the prices hospitals pay for implantable medical devices. “They pointed to marketplace dynamics – the degree of competition within a local market and the market power of hospitals purchasing the devices – as key influences. Additionally, they noted that the support offered by manufacturers, such as device servicing agreements and training, as well as the terms and length of the contract itself, play a role in price negotiations. Finally, the manufacturers told us that the extent to which changes in device technology improve patient care affects what hospitals pay for IMDs.”

Some contracting executives aren’t buying it.

“I did some work relative to price transparency,” says Wieder, who uses the VHA PriceLYNX comparative pricing database. “What I found was dispiriting. We were paying $1,200 more for pacemakers than some other organizations. When I investigated it, [vendors would say], ‘You’re too small, you don’t have as much volume,’” he says. “But that didn’t make any sense to me, only because I couldn’t believe it was costing more to produce my pacemaker than somebody else’s.”

Wieder says he had an epiphany when shopping for a camera for his son this past winter. “I found I could get the same one at the same price everywhere. The only difference might be someone might ship it for free, or include an instruction manual.

“I thought, ‘If Nikon has the same price point, why don’t these manufacturers have the same price point for all the hospitals they sell to?’”

Vendors take exception to his logic, says Wieder. “They’re going back to the old Adam Smith rule of supply and demand. But I call it old business practices.

The world has become flat because of computerization and information systems.” Medicare and Medicaid, as well as private payers, have impressive data-collection skills. “They are going to start asking questions like, ‘Why are we paying one hospital [for procedures] more than another, based on the product cost?’”

Business as usual?
Not all contracting executives are as dead set against signing confidentiality agreements as Wieder. And that’s causing heartburn in some quarters.

“Some of our members aren’t even aware of the problems [presented by] confidentiality agreements,” says Amerinet Vice President of Contracting Dale Wright. “They think it’s standard practice. But we’re trying to educate them that this is not necessarily how business is or should be done. We’re saying to them, ‘Don’t handcuff yourself.’”

Confidentiality clauses, which prohibit supply chain executives from sharing pricing with their agents, consultants, sometimes even the doctors who practice in their IDNs, “only serve one entity – the supplier,” says Wright. “If you think about commerce in general, where else would you go to a store and not know what you’re paying, or what the market is worth out there?”

“Novation and VHA are not supportive of confidentiality,” says Nik Fincher, vice president, analytics sales, VHA. “In my experience, when I see somebody get trapped into that, and told they are getting a great price and shouldn’t let anyone else see it, you’ll find just the opposite has happened. There are enough of those stories around so that you have this general acceptance in the supply chain that confidentiality is not a good thing.

“We have seen in our LYNX products time and time again: When you look at the entities you would expect to get the best pricing, that has not been the case. It still appears that, more than keeping a secret, the best way to get the best price is to give the supplier as much business as you can and maximize contract usage.”

Comparative databases
Like Volpe, Lori Graham, surgical purchasing manager for Wayne Memorial Hospital, Goldsboro, N.C., sees confidentiality clauses on almost every contract she sees. “They’re across the board – implants, instruments, equipment, disposables, reusables.” Even distributors are stipulating that the IDN keep secret their fees, she points out.

Seldom do the clauses explicitly prohibit Graham from sharing Wayne Memorial’s pricing with surgeons or other clinicians, she says. “It’s more, ‘You are not to share our pricing,’ and I’ve taken that to mean, don’t share it with other facilities or suppliers.”

Despite these obstacles, Wayne Memorial has found a way to access benchmarked pricing – in this case, the Premier OrthopedicFocus and SpendAdvisor products, as well as the ECRI PriceGuide – and use it to save money on implant purchases. The information is blinded, meaning Wayne Memorial doesn’t know the prices that individual hospitals and IDNs are paying, nor do other participating facilities know what Wayne Memorial is paying.

Vendors have suggested that pricing databases are unreliable, because they can’t reflect rebates, volume discounts, etc. And supply chain executives do seem to take them with, if not a grain of salt, at least with eyes wide open. But for many, these databases are a valuable tool in the contracting process.

“They are a guide, a snapshot of what’s being done in the marketplace,” says Graham. “They give you a high-level view.” But Graham knows that a multitude of factors come into play when it comes to pricing. Is the facility for-profit or not-for-profit? What is its size? Is this a multisource or sole-source agreement? “So you can’t bank on getting to that low number.”

“We know there are flaws, but they’re minor,” says Volpe, referring to comparative pricing databases. Volpe is aware that manufacturers use rebates to mask lower pricing, and he considers that possibility when examining the databases. “But at the same time, they give us a sense of where we are relative to the market. We have a better idea of how we can negotiate.”

Bob Boswell, vice president, supply chain operations for OhioHealth, Columbus, Ohio, says that most vendors are OK with providers submitting pricing data to benchmarking organizations, because the data is blinded. “I know the effort that goes into making credible data,” says Boswell, whose IDN was instrumental in the formation of VHA PriceLYNX. But Boswell, like other supply chain executives, looks carefully for outliers.

He feels he has to, not only so he can enter negotiations on firm footing, but so that he can maintain credibility with the surgical team. “Once our physicians feel that the information is credible, they’re willing to work with us to get a better price. But if they see something that looks extraordinarily low, it would only take one or two of those to make them question the data.”

To compile the database for VHA PriceLYNX, the organization collects information from 1,600 members on a regular basis, says Fincher. “We have $64 billion of data and more than 6.4 million items in our data file.” To be included in the database, each item must include multiple price points.

The database allows members to see base prices, as well as typical rebates and discounts, says Fincher. “Our subscribers want to dispel the myth when [vendors] tell them, ‘You can’t get to this tier because you’re not committed to this level.’ Our tool will allow you to see, ‘Is that the way this supplier really prices?’ When you have a database as large as ours, you will see data trends that will either prove or disprove things.”
And the issue of confidentiality and price-sharing? Not much of an issue at all, says Fincher. “Our members are sending us their a/p files; they’re not sending us their contracts or agreements. It’s just, ‘Here’s an item and here’s what we paid for it.’ That is clearly their data.”

Pricing discipline
Novation President and CEO Jody Hatcher makes the case that pricing databases are good for providers and vendors. “The marketplace is becoming more sophisticated,” he says. “There’s a recognition that pricing transparency is occurring in this industry, much as it has in the consumer market. It will also be a pervasive force in this marketplace.”

And how can that work to the vendors’ advantage?

Sellers complain all the time that they give the provider their best price, only to see the provider shop it around, says Hatcher. “My contention is, the reason they do that is because [providers] don’t necessarily believe it is the best price. But if you can provide evidence about the distribution of pricing in the marketplace in a more transparent way, a lot of inefficiency in terms of re-negotiation will be driven out of the market.”

Perhaps a more fundamental issue, and one that is being forced to the surface because of the ubiquity of information available today, is that of pricing discipline.

“Healthcare reform is forcing suppliers to exhibit discipline,” says Hatcher. “They used to allow all their reps pricing authority. They would have national pricing guidelines, and then deploy decentralized pricing authority to the sales organization.” But in today’s environment, providers are looking to buy less, and vendors are looking to reduce SG&A costs, he says. Disciplined pricing can help both sides.

And some vendors agree.

“Historically, as a company, we have allowed reps to price items,” says one med/surg distribution executive. “We’ve given them flexibility, so that for any given item, we may have 500 different price points.” Like those of many suppliers, this company’s sales executives are frustrated when buyers, after consulting one of the pricing databases, demand the lowest price, even though their volume may not warrant it, he says. Or a customer may demand lowest price by SKU, not understanding that suppliers use the “loss leader” concept in their approach to pricing.

“It leads to an interesting dynamic in the market,” he says. “I refer to it as a race to the bottom in the profitability chain.”

There’s only one way out of these frustrating and counterproductive situations, he says. “[Suppliers] are going to have to become very disciplined, and treat every customer the same, with the same rules and boundaries,” he says. Suppliers in every market segment are facing the same choice, given the ubiquity of pricing data in the market, to the point that consumers can scan an appliance with their smartphone, then find out prices for the same product in competing stores in the immediate geographic area.

“If we believe we have this unique problem in healthcare, we’re mistaken,” he says. “Everybody knowing your price to certain customers is going to remove any ability to have one-off and special deals….I think the days of [vendors] getting a crazy price on an item and not ultimately embarrassing themselves with the customer and losing the business are gone. Buyers are way too smart; access to data is way too available; and those [suppliers] that don’t want to become disciplined will be crushed.”

John Marotta, CEO, Emerge Medical, agrees. “We want everyone to know our pricing, and confidentiality agreements between doctors and hospitals need to go away,” he says. Denver, Colo.-based Emerge manufactures orthopedic surgical devices.

In healthcare, sometimes the best customers get the worst pricing, he says, primarily because of tight-knit relationships between surgeons and vendors. “The issue is, the decision-maker [who uses] the product isn’t the hospital, it’s the physician, and the hospital is stuck with the purchase. So there needs to be pricing transparency in order for the physician and hospital to work together to make buying decisions.” Pricing transparency can help manufacturers reduce their SG&A costs, and devote more of their profits to developing innovative technologies, which is what they should be doing, he says.

Surgeons’ involvement
Most providers would agree that surgeons need access to pricing information. And that’s why many either refuse or sidestep vendors’ demands for total secrecy, according to those with whom JHC spoke.

Fincher agrees with those who believe that as scientists, physicians are driven by data. “The best way to influence physicians’ behavior is to provide data they can look at and analyze. Comparatively and statistically, it makes sense.” Pricing databases “open the door to a new level of communication with physicians,” he says.

Says Wieder, “We have to be competitive in the marketplace. If we’re paying a premium for a product, we can’t be competitive. The doctor can’t be competitive either, because [he or she] might lose business to a neighboring hospital or group. They need to know what the prices [of medical devices and implants] are in order to be competitive.”

Meanwhile, Boswell’s team shares cost information on the products and implants each physician uses in his or her procedures, so they can compare their performance against others. “Then we collect that information at the end of the meeting,” he says. The system works out well, because “they’re there to help us make good decisions.” Having reliable information, for all to see, helps make that happen.

What now?
Attempts to legislate pricing transparency have failed before. But will they succeed this time around? “I don’t think [legislation] really had legs before,” says Wright. “But this time, it feels like it’s been teed up a little higher. It’s gaining some momentum right now.”

Some believe even if legislative efforts fail, market forces will bring about transparency.

“Ultimately the payer will drive the change,” says Marotta. Take bundled payment systems, for example, which call for providers to receive one payment for a procedure, and split the excess profit or share the loss. “If you have a pedicle screw system or some other medical device, and one costs $6,000 and another – that produces the same clinical outcomes – costs $3,000, which will the surgeon use?” he asks. They will migrate to the lower-priced device.

“So surgeons will be competing against the medical device company for their pay at the end of the day,” he says. “And who’s going to drive it? The payer, because hospitals are not having success in doing this. Incentives drive behaviors.”

“The key point is that some purchasing agents are fighting confidentiality clauses and others are not,” says ECRI’s Lerner. “It is important that more join in this common effort aimed at a public good, rather than seek to benefit from the courage of others, if they know – or should know – that signing confidentiality clauses keeps overall prices artificially high.

“The free market needs reliable comparative information to operate efficiently. ‘Free riders’ fool themselves if they negotiate discounts from an anchor price that is too high and which results in them still overpaying after they achieve their ‘discount.’ The chances of the government intervening will increase if the private sector thwarts the free market, and if too few individuals defend the public’s interests.”

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