HSCA: Left to Their Own Devices

Pricing secrecy drives up costs, says government report

The U.S. Government Accountability Office (GAO) recently issued a report that confirmed what healthcare group purchasing organizations – their hospital members and customers – and anyone on the front lines of patient care knows: Medical device pricing secrecy decreases competition. “Gag clauses” limit the ability of hospitals and their GPO partners to effectively negotiate for medical products and services. They artificially drive up healthcare costs, leaving hospitals, patients, Medicare and American taxpayers to foot the bill. Left to their own devices, and without appropriate Congressional review and action, medical device manufacturers will continue to drive the cost of healthcare in this era of critical cost containment.

The GAO report, entitled, “Lack of Price Transparency May Hamper Hospitals’ Ability to Be Prudent Purchasers of Implantable Medical Devices,” examines pricing information for expensive implantable medical devices (IMD) and determines that there was substantial variation in the prices hospitals paid for the same devices. The GAO concluded that pricing secrecy clauses limit the ability of hospitals to negotiate for the best price.

Medical device contractual confidentiality agreements (“gag clauses”) prevent hospitals from sharing their own data and validating that they are receiving a fair price on the products they buy. Contracts between manufacturers and hospitals often forbid disclosure of prices, even to doctors, which makes it difficult to get physicians the information they need to consider cost when making decisions about devices. As a result, some hospitals unnecessarily pay thousands of dollars more than others for high-cost medical devices such as defibrillators, stents and hip replacements. In summary, these are not just the typical confidentiality clauses.

The GAO report finds that the price variation in what hospitals paid for the same types of devices is stark. For example, one hospital surveyed paid $8,723 more than another facility for an identical model of a device that regulates heart rhythm. In general, the item would cost a hospital between $16,445 and $19,007. One hospital reported spending about $4,500 for a specific primary total hip construct, while another paid about $8,000 (78 percent more) for the same device. In another instance, one hospital paid about $5,200 for a primary total knee replacement, while another paid about $9,500 for the same thing (i.e., 83 percent more).

The problem is even more obvious in small and rural markets, where community hospitals often lack the bargaining power of the larger facilities. This is particularly problematic in negotiations with behemoth device corporations. Without GPO benchmarking, hospitals do not know what the appropriate price is and are forced to negotiate with device manufacturers with asymmetric information. In an environment of increasing healthcare costs, the lack of price transparency will lead to higher Medicare spending. As the Medicare population grows and beneficiaries live longer, the demand for IMDs will increase. The Medicare program will continue to pay for an increasing number of procedures involving IMDs in the future.

Hospitals frequently deal with strong physician-manufacturer relationships regardless of the fact that physicians are not involved in price negotiations for IMDs. Strong physician preferences on varying models of IMDs reduce the ability of hospitals to standardize on one product, hence depriving them the ability to create economies of scale and reduce costs. Physicians also rely on manufacturer representatives to provide technical support during procedures, such as help with setting up the operating room, consulting with the physician about the procedure, and programming devices. Physician loyalty to certain manufacturers with whom they have consulting or professional relationships has been thoroughly documented. If manufacturers determine that a physician is unwilling to switch device models, they can be more aggressive in negotiations, often resulting in higher prices for hospitals, according to the GAO.

The medical device industry leverages its army of salespeople to drive unnecessary utilization and further enforce contractual “gag clauses” through litigation to keep prices a secret. This chills opportunities for collaboration and gives device makers a virtually unchecked ability to drive up costs for hospitals and Medicare. Because hospitals are unable to discuss device prices with the physicians who choose which products to use, hospitals have effectively become third party payers. It is common sense that keeping prices secret creates an inefficient marketplace. Imagine if you tried to buy a television, and the salesman told you he had four models of TVs, but that he wouldn’t tell you the price until you received your credit card statement in the mail. Would you shop there again?

You certainly wouldn’t expect to receive the best deal.

The medical device community often protests that medical devices make up only 5 percent of all healthcare costs. Hospitals, however, make up a much larger percentage of healthcare costs, and it is generally acknowledged that medical supplies often make up approximately 40 percent or more of all hospital spending. It is well documented that for many procedures, payments to manufacturers now take up virtually all of the hospital’s Medicare DRG. This is unfair and unsustainable.

Hospitals rely on GPOs to deliver the best products at the best value. All independent analyses show that GPOs save hospitals billions every year. GPOs have also received votes of confidence from the GAO, Department of Justice, Federal Trade Commission, U.S. Supreme Court, academia, and virtually all of America’s 5,000+ hospitals. It is time to remove the barriers to true transparency and further unleash the hospital cost-savings potential of GPOs.

The GAO report shows that medical device pricing secrecy is impeding the ability of hospitals and GPOs to lower costs and achieve private sector cost containment. At a time when all parties to the healthcare system are trying to rein in spending, Congress should take steps now to eliminate contractual gag clauses and increase price transparency in the medical device marketplace.

About the Author

Curtis Rooney
Curtis Rooney is president of the Healthcare Supply Chain Association, www.supplychainassociation.org
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