In October of 20007 – almost three years ago – Senators Charles Grassley and Arlen Specter introduced Senate Bill 2221, otherwise known as the “Transparency in Medical Device Pricing Act of 2007.” This bill simply requires medical device manufacturers to report the average and median prices of their products quarterly. They don’t reveal this information now because they use a variety of financial incentives to induce physicians and hospitals to use their devices (since I don’t fully understand libel law, I won’t call these “financial incentives” bribes and kickbacks).
SB 2221 is bottled up in the Senate Finance Committee. It was “stopped in its tracks,” which means it is pretty well dead. You can bet that the so-called deficit reduction commission won’t show much interest in how this bill would prevent a major rip-off of health care consumers, the biggest of which is the U.S. Government. The commission’s mostly conservative members want to go after Social Security and Medicare benefits.
The problem boils down to this: if an industry keeps secret and controls all pricing information, the negotiating powers of purchasers of the industry’s product are drastically reduced. Furthermore, discounts and other goodies provided as incentives to use the product will not be accounted for in pricing. Hospitals and physicians not willing to “play ball” will pay the full freight for the product because they will have no idea what their competitors are actually paying.
Health care in this country is theoretically based on the “free market” concept, which should result in the best health care at the lowest price – this is the efficient market hypothesis. If an industry can manipulate and control prices, the free market is a joke. This type of situation is all too common in the “Rube Goldberg” nature of the current U.S. health care system. The “free market,” as it is practiced in health care, is actually driving up prices.
How does pricing practices in the medical device industry drive up prices? Actually, a bulletin issued by King & Spalding, a high-powered lobbying firm for the medical device industry, explains it very well:
“Increased transparency of device pricing might especially impact the hospital’s purchasing costs of ‘high sticker price’ implants, allowing the hospital to reduce the publicly posted price charged for specific services and procedures that utilize the device and still maintain a favorable operating margin for that service. In this context, where the hospital’s own pricing will be in the spotlight, hospital administrators will look closely at all opportunities to drive down purchasing costs and to negotiate purchasing prices based on market-based pricing information” (Client Alert, dated December 4, 2007, page 2).
This King & Spalding bulletin warned its clients that “Pending legislation proposes a federal price reporting requirement on implantable medical devices that could prove to be extremely complicated and costly to device manufacturers” (page 1). The bulletin also stated that “Hospitals have reported to Senator Specter that implantable devices … represent close to 40% of their expenditures” (page 2).
The Tallgrass Activist will continue to blog about health care technology. Medical advances are a wonderful thing but they pose a far bigger problem for health care financing than a moderate shift in the demographics of age. The impact of a change in the proportion of the 65+ population from 13% to 20% of the total U.S. population is quite manageable. However, the medical device industry is massive, powerful, profitable, and quite attractive to investors. The website BNET reported that none of the top 30 medical device manufacturers had less than $1.5 billion in revenues in 2006*. You can find a list of the behemoths in this industry at Espicom, a business intelligence website**.
It is not surprising that a powerful industry can kill a bill by pressuring a committee to pigeon hole it. But it is hypocritical of Congress to claim that decent health care for all Americans is unaffordable while they allow deceptive pricing practice that inhibit control of health care costs.