Getting value from medical devices

The buyers of medical devices aren’t very good shoppers. They lack the kind of information about technologies that would help them make value-based purchasing decisions, according to James Robinson in the most recent issue of Health Affairs.

This issue is so important because medical technology is the No. 1 factor driving up health spending in the U.S., according to the Center for Studying Health System Change in their recent report, High and Rising Health Care Costs: Demystifying U.S. Health Care Spending.

What are medical devices? They’re the hardware used by surgeons and clinicians in curing, cobbling together, stabilizing, and managing patients’ medical challenges. They cover orthopedics, interventional cardiology, cardiovascular surgery, and neurosurgery. The technologies represented here are collectively known as “physician preference items.” They can account for one-third of overall hospital supply costs and are growing as a percent of total costs according to the Financial Leadership Council of the Advisory Board. They have an FDA-designed life cycle, as shown in the figure.

Robinson identified several factors that cause market failure for value-based purchasing of medical devices:

  • Physicians’ weak business relationships with their hospitals
  • Physicians’ strong bonds with medical device companies
  • Shifts of surgical facilities to competing sites (e.g., physician-owned heart hospitals).

There’s also lack of price transparency in medical device negotiations and the need for performance data of the devices in real patients (in other words, useful outcomes data).

Robinson found that the “demand side of the market” lacks the price and performance data that would bolster a healthy market and drive a buoyant, high quality supply side of devices. Complicating the market are intermediaries, such as group purchasing organizations and insurance plans that may misalign incentives and skew the market away from true patient value.

Jane’s Hot Points: Among many smart observations of Robinson’s, one is particularly striking: that a hospital’s and medical staff’s ability to adapt to a changing technological environment is a “larger organizational ability to evaluate and improve the many processes of hospital care.”

What could address this misalignment and mis-cuing of the medical device market that would move it toward value-based purchasing? Price transparency; studies into clinical effectiveness comparing existing technologies with new; and rational reimbursement based on the studies. Robinson also suggests transparency of physician relationships with device firms in terms of consulting fees and other financial relationships; and, aligning incentives such that physicians’ clinical services (and not their own pocketbooks) would be rewarded for using the devices with highest patient value.

As medical device spending is a major health cost driver, adopting these strategies could go a long way to reducing the rate of health cost inflation in the U.S.

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  1. Medical devices are a minor driver of healthcare costs, and James Robinson’s screed about the industry is off-base, poorly researched, and in some cases, factually incorrect.
    Medical devices from 1989-2004 grew at approximately 1% per year on a compound annual rate, as compared to all medical services at 5% and the CPI at 2.7% (King and Donahoe, 2006).
    The US Medical Device industry in 2007 accounted for approximately $94 billion in spending (AdvaMed). The US healthcare market in 2007 was approximately $2.3 trillion, so medical devices are 4% of the total healthcare bill, a smaller percentage than 1989-2004, when they ranged averaged 6% (King and Donahoe, 2006).
    In its 2005 annual survey (but not in its most recent survey, curiously), the American Hospital Association identifies the biggest drivers to spending growth. Medical devices weren’t even listed. They were lumped under “other” which accounted for 8%.
    So: medical devices are a tiny part of the market, a tiny part of spending growth, but what about value? What is the value of a defibrillator or a total joint replacement? The value delivered by medical devices far outstrips the costs. For example, in the total joint market, each surgery saves almost $70,000 over the life of the average patient vs. non-surgical intervention (Gottlob, AAOS, 1996, Chang, 1998; dollars adjusted to 2007). In the US, approximately 820,000 (Kurtz, JBJS, April, 2007) total joints are replaced per year. The US market for total joints is approximately $6.2 billion. So each year, those total joint replacement patients shave $56 billion off of their lifetime healthcare costs.
    Robinson goes on to make several factual errors in his discussion of relationships between manufacturers and surgeons. First, he states that the orthopedic companies paid “fines.” They did not. The payments were civil settlements. Second, he states that companies pay “millions” and fails to mention that those surgeons who receive millions invariably are paid royalties as developers of successful products, contributing intellectual property and, in many cases, patented technology. It’s ok for inventors in other industries to be rewarded for their ideas, but not in healthcare, apparently. I would argue that it’s more important in healthcare than in other industries.
    Robinson says that payments are tied to volume usage. In fact, healthcare providers cannot be paid based on their personal usage or volume without triggering the anti-kickback statute. However, royaltied inventors would receive payment based on the commercial success of the product. In those instances, “volume” would contribute to payments. But Robinson goes out of his way to make the reader think that doctors are being paid millions to simply use a particular brand of product. He provides no factual basis for this assertion.
    As far as price transparancy, it’s a myth that buyers do not have access to pricing information. Group Purchasing Organizations (GPOs) are the biggest customers for implants in the US. Premier is the largest GPO, with 2000 of the 5000 US hospitals as members. Most hospitals are members of more than one group. Since GPOs are the biggest buyers of implants, and, as they claim, get the best prices, then they and their member hospitals absolutely know what the best prices are. Robinson’s argument simply doesn’t hold together.
    If GPO data is not enough for any given hospital, anybody can buy this information. In the orthopedic business, a publication, Orthopedic Network News, routinely reports average selling prices for all total joints marketed in the US. Subscription price: $200 per year.
    CMS has cost data for every procedure it pays for. If it wants the information disclosed, why doesn’t it just go ahead and disclose it? Flip a switch. Done.
    Despite all of this supposedly Machiavellian manipulation by the medical device industry, hospitals were still able to post net profit growth of 21.8% in 2006 and 22.8% in 2007 (Modern Healthcare, 11/10/08, 12/24/07), the highest level in 15 years.
    It’s clear to me that Dr. Robinson’s research was cursory and agenda-driven. I think a meaningful discussion of healthcare reform needs to include the appropriate and cost-effective use of technology, but attempting to make a scapegoat out of an industry that has actually made healthcare more accessible, affordable, and effective for millions of patients merely distracts from the larger issues.

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