Medical Gear Squeeze (Device Pricing)

[Harrison]

The article below is primarily focused on orthopedic devices like knee and hip, but also applies to spine. See this pricing topic from our community: How much does artificial disc replacement cost?

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NOVEMBER 4, 2009
Medical-Gear Squeeze
Discounts on Devices Tied to Confidentiality Clauses

By JON KAMP
While U.S. hospitals are pressuring medical-device companies to lower costs on high-tech implants, they often are negotiating from a weak position because they don't know what they should be paying.

Manufacturers closely guard prices hospitals pay for complex products such as replacement joints and heart devices, making it tough for other hospitals to judge the market. Industry critics say improving transparency would benefit hospitals that are often outmatched by big companies with close ties to product-choosing doctors.

"It's not for nothing that the manufacturers don't want people to know" price details, said Annemarie Bridy, an associate professor at the University of Idaho College of Law who has written about the issue. "The opacity is valuable to them."

Device companies often require confidentiality clauses that treat price as a secret. These can keep hospitals from divulging prices to companies that aggregate and sell data to help define the market. Hospitals sometimes fight this requirement, but it is difficult when manufacturers tie price discounts to confidentiality, said Joe Volpe, supply-chain vice president for Wheaton Franciscan Services Inc., a nonprofit health system in the Midwest.

The devices industry acknowledges it keeps prices private but questions the benefits of divulging them. An industry-funded study released after Senate legislation triggered a debate over transparency two years ago, for example, questioned whether hospitals would pass along cost savings.

The study also suggested price disclosure could backfire and lead to higher prices, as it has in other industries, while raising the prospect of collusion.

"The evidence is strong that the competitive forces in our industry work extremely well," said David Nexon, senior executive vice president at the Advanced Medical Technology Association trade group, known as AdvaMed. He also said confidentiality agreements are common when industrial companies sell their wares.

The devices in question are often referred to as "physician preference items" because doctors pick them. Big manufacturers include Medtronic Inc., Boston Scientific Corp., Zimmer Holdings Inc. and Stryker Corp.

While basic medical products such as gauze and IV tubes may be interchangeable commodities, sold cheaply and purchased by big buying groups, hospitals are generally on their own for pricey, high-tech implants. These are obvious targets for hospitals damaged by the recession and hunting for savings.

Some device-industry critics make a business of mining price data. John Bardis, chief executive at supply-chain management firm MedAssets Inc., is a critic who said he believes hospitals could reap billions in savings by better understanding product prices. Confidentiality clauses became a big issue five years ago when Guidant Corp., now part of Boston Scientific, sued MedAssets' Aspen Healthcare Metrics unit over price collecting. Guidant also became entangled in a similar suit with another organization. While the cases were settled confidentially, they still had a "chilling effect," according to Ms. Bridy, who was involved in one case.

Stan Mendenhall, who edits and publishes a newsletter called Orthopedic Network News, said he shifted to reporting more vague average selling prices after the Guidant cases. Companies will sometimes disclose averages as well, and the stalled Senate legislation would have required the publicizing of average and median prices. But averages can leave the market's borders undefined.

Mr. Mendenhall, for example, said he has heard of hospitals paying less than $2,000 to more than $12,000 for the same orthopedic hip components, and other experts also noted wide disparities. These can reflect complex deals or discounts for big buyers, but also hospitals' lack of market insight.

"When we're looking especially at these large devices, we're flying blind," said Terri Kendrick, director of purchasing at Wheaton Franciscan. While there are entities providing some insight into device prices today, she said it is an incomplete picture.

See original WSJ article here.