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The Power of Negotiated Prices

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A lot of health care is wasted because it’s not very effective. David Leonhardt of the New York Times returned to that theme in a useful article in today’s paper. But when will economics writers with broad reach like Leonhardt begin writing about the bigger problem behind skyrocketing health care costs, and the one that’s more easily fixed — unjustified high prices for drugs, devices and procedures?

One need only review the past decade’s history of the pricing of drug-eluting stents, which are used during percutaneous coronary interventions to prevent further arterial blockages, to get a window onto the problem. They were introduced around 2003 at a price point — about $5,000 a stent — that was five times the bare metal stents they replaced.

Did the evidence suggest they were better? Not really. Was it worth that level of extra costs? Absolutely not, according to this systematic review of the literature. And when it was learned in 2008 that they might actually cause new blockages, their sales — and prices — dropped like a rock. When industry funded new studies showing that might not really be the case, sales — and I bet prices, although the latest data is hard to find — began edging back up.

Given that history, ask yourself this question: Was the original high price required because of the cost of inventing the product, as industry always claims? Clearly not, given the companies’ willingness to adjust prices immediately when confronted by new marketplace realities.

There’s a million stents inserted a year, give or take a few hundred thousand. Could you eliminate, say, 10 percent of that multi-billion-dollar cost by giving physicians comparative effectiveness research that would encourage them to put their patients on a solid diet-and-exercise routine instead of a costly invasive intervention, as Leonhardt suggests? Absolutely. But it’s a tough row to hoe.

The system could save a lot more money a lot faster if hospital administrators bargained the price of the 90 percent of drug-eluting stents that will be inserted no matter what down to their true medical value — which is about the same as the bare metal stents. That’s anywhere from a half to a fifth of their current price.

As Uwe Reinhardt, the Princeton professor who serves on insurance company boards and doubles as a blogger on the New York Times website, said in 2003: “It’s the prices, stupid.”

It’s time for health care writers to focus on the prices paid for individual items that go into the nation’s skyrocketing health care tab. Remember the “wasteful defense spending” stories like the $600 hammer that appeared a few decades ago? One didn’t have to convince Americans that defense spending was bad to get the public outraged about such obvious ripoffs. Health care is an analagous situation. One can spend years trying to convince physicians and patients that this new procedure, test, drug or device that might save or improve their lives really isn’t necessary. Or you can spend a half hour showing them that its price is just too damn high.

There’s an awful lot of $600 hammer health care stories out there for enterprising reporters willing to look.

Another issue is physician pay, which is wrongfully skewed in favor of high-priced specialists. The upcoming debate on restoring the 20 percent cut in Medicare reimbursements for physicians provides an excellent opportunity for reporters to write articles that highlight the average pay of various specialties (see this GoozNews post). Such articles would be an enlightening backdrop for the negotiations now taking place on Capitol Hill between the American Medical Association, the specialty societies, and Congress.

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect and The Washington Post. His most recent book, The $800 Million Dollar Pill – The Truth Behind the Cost of New Drugs ” (University of California Press, 2004) has won acclaim from critics for its treatment of the issues facing the health care system and the pharmaceutical industry in particular. You can read more pieces by Merrill at  Gooznews.com, where this post first appeared.

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PeterTom LeithBarry CarolMargalit Gur-Ariespike Recent comment authors
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Peter
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Peter

“We need to fix the system so we are like Europe in that way,”
Yes, regulated prices where you don’t need lawyers to defend not paying exploited prices and everyone knows what cost they will face and that costs will be the same for everyone – like Canada Nate, where you shop.
Here in NC it would be hard to refuse payment, at least from UNC state hospital, as the Attorney General’s Office is the collection agency for the hospital. Just try to out spend the state government. Your house will be gone first.

Nate
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Nate

Ahhmmmm…. Like in Liverpool? no not even close. Telling someone a third party will not pay for their experimental drug but they are allowed to buy it themselves is nothing like taking away the food and water of someone in a morphin induced stuper without telling them and their family. Nice to know you don’t see a difference though. Pretty much. What we do isn’t going to help the uninsured. That being said if we are successful it should; 1. lower operating cost 2. reduce insurance cost lowering the number of uninsured 3. open the door for creation of products… Read more »

Barry Carol
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Barry Carol

“It seldom goes to court becuase the provider would have to explain in court for all to hear why they; A. used unapproved hardware, off-label, in a surgery, they don’t want the patient finding this out B. why they are charging 400-600% or more of their cost to deliver these services, another argument they don’t want to have in public.” Nate – It sounds like the core of your challenge to these costs, especially under your point B circumstance, is that the provider is dealing in bad faith. That’s a good argument, I think, but one that most uninsured individuals… Read more »

Margalit Gur-Arie
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“We need to fix the system so we are like Europe in that way, if something is not cost effective, even if it adds 5 days of life, you can deny it, right now for all praticle purposes that is not legal in the US.”
Ahhmmmm…. Like in Liverpool?

Nate
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Nate

no one, there are attorney’s on retainer to defend the employee and plan if providers try to bill for the amounts. If they take it as far as court, they seldom do, and win, even rarer, the insurance companies we use will pay the difference. They might get some scary letters trying to pressure them into pressuring us into paying but they aren’t at any risk of actually having to pay. It seldom goes to court becuase the provider would have to explain in court for all to hear why they; A. used unapproved hardware, off-label, in a surgery, they… Read more »

Peter
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Peter

“We’ll deny 60K of hardware from a back surgery if it was off label. We’ll cut 130K off a 240K hospital bill if it exceeds their cost by to much. We’ll just out right not cover injectables and speciality meds; Pharma can do their research at their own cost.”
So who picks up those costs – the employee?

Tom Leith
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Tom Leith

On GPOs & volume & devices — it really isn’t under the hospital’s control, it is under the doctors’ control. If one doc wants brand X, another brand Y and the thrid brand Z, the hospital stocks all three and basically can’t cut a deal. The manufacturers want you to take their whole line and they want an exclusive at least on some of their high dollar stuff. If the docs can’t be brought on board, the hospital’s stuck — the hospital’s customers are doctors, not patients and certainly not payors.
t

Barry Carol
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Barry Carol

One little noted provision of the recently enacted health reform legislation will require employers, starting in 2011, to disclose on employees’ W-2 forms exactly how much the employer paid for health insurance on the employees’ behalf. If employees are wondering why their wages have stagnated, they need look no further than that number. Perhaps then employees will start to care about how much services, tests, procedures, drugs and devices cost even when insurance is paying the bill. Employers might start to show more interest in limited or narrow network products. Tiering, especially for hospitals, could also help in encouraging employees… Read more »

spike
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spike

Regarding hospital purchasing… they do have Group Purchasing Organizations that are supposed to do that for hospitals. I know some of those arrangements are fairly corrupt, i.e. the GPO is getting a fee from the hospital and a fee from the supplier to make the connection so keeping costs down may not be a high priority, but for other GPOs, lower prices is their only reason for existence, so you’d think they’d be ok at it. I think the move towards aggressive GPOs really picked up in the past 3-5 years or so, maybe it needs more time to have… Read more »

spike
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spike

But it’s the same reason Partners Healthcare in Boston is able to charge multiples of what neighboring hospitals charge. The suppliers, be they medical providers, device makers, pharma, etc., know that they’re the ones in the driver seat when dealing with the insurance companies. If you don’t get Hospital X in your network, your employees will riot and Hospital X knows it. The politics are all on the side of the suppliers, not the insurance companies, and it seems like employers don’t care, they just want happy employees who have high-priced drugs in the formulary and high-priced hospitals in network.

Roy M. Poses MD
Guest

Margalit Gur-Arie, Yes, I meant in advance negotiating the prices of particular items. I did not mean denying claims post-hoc. I did not mean trying to discourage a patient from getting a particular good or service. I was not talking about utilization. I was talking about prices. For example, negotiate the hospital fee for implanting a stent, or the price of the stent itself, or the price of a particular drug infusion given during the procedure, etc, etc. Some examples of obviously over-priced items from Health Care Renewal: http://hcrenewal.blogspot.com/2005/07/oh-prices-we-pay-thalidomide-for.html http://hcrenewal.blogspot.com/2005/03/costs-of-computer-based-medical.html etc, etc, etc Again, the issue is not just for… Read more »

Margalit Gur-Arie
Guest

Hmmm, maybe I misunderstood, but I think that “better negotiate the prices” relates to negotiation of allowables beforehand, not denying to cover claims after the fact, in which case you are just shifting the cost to the employee instead of driving it down.

spike
Guest
spike

Wow I agree with Nate. But yeah, the politics are so bad for insurers and have been for 15 years so there’s no way they could negotiate prices aggressively. It does continually surprise me that employer groups put up with it though. I guess they’re just letting wages stagnate so it doesn’t much matter to them that health costs go up. So you’d really think the employees would want to push down costs like this…. but that doesn’t happen either. So… no one group has the ability to eliminate this market failure. Hmm…. isn’t that usually when government is most… Read more »

Nate
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Nate

“Why don’t insurance companies better negotiate the prices of nearly everything?” Becuase the clients that pay them to manage cost don’t want them to. We have some clients that give us free reign to attack cost, and we piss off a lot of people doing it. We’ll deny 60K of hardware from a back surgery if it was off label. We’ll cut 130K off a 240K hospital bill if it exceeds their cost by to much. We’ll just out right not cover injectables and speciality meds; Pharma can do their research at their own cost. Those clients are very few.… Read more »

Roy M. Poses MD
Guest

The next big question is why there seems to be so little negotiation of prices, at least here in the US.
Why don’t hospitals negotiate the prices of drugs, devices and supplies?
Why don’t insurance companies better negotiate the prices of nearly everything?
Why does CMS not negotiate the prices of physician services, and instead allows them to be effectively set by the RUC, a secretive AMA committee?
(See these posts from Health Care Renewal:
http://hcrenewal.blogspot.com/2007/03/on-disparities-between-reimbursement-of.html
http://hcrenewal.blogspot.com/2008/07/can-we-fix-medicare-while-pretending.html
http://hcrenewal.blogspot.com/2009/02/what-ruc-again-one-of-worlds-most.html
http://hcrenewal.blogspot.com/2009/06/letter-from-ruc-and-my-reply.html)