Price Variation and Confidentiality in the Market for Medical Devices

The Government Accountability Office (GAO) recently released a report that cites “substantial variation” in the prices paid for implantable medical devices in the Medicare program, and a lack of robust data needed to properly compare the prices paid for these devices across surveyed hospitals. A key driver of both of these findings is the existence of confidentiality clauses in medical device purchasing contracts that prohibit hospitals from sharing prices with third parties, including physicians, the health plans that pay for these devices, and patients.

It was with a sense of déjà-vu that I read this report; in 2010, UC Berkeley professor James Robinson and I published a series of briefs looking at variation in implantable device prices in California hospitals as part of a joint Value-Based Purchasing of Medical Devices project between the Berkeley Center for Health Technology and the Integrated Healthcare Association (IHA). This project included data collection on device costs, total surgical costs, complications, and length of stay for seven orthopedic and cardiac procedures in 45 California hospitals.

The data, as well as a series of IHA-sponsored roundtable conversations with stakeholders, found the same thing that the GAO report finds: a lack of transparency in device prices, sometimes driven by clauses that prohibit hospitals from disclosing the prices paid for devices, a lack of alignment between hospitals and the physicians practicing within their facilities, and very substantial variation in both the prices paid for devices and the total costs of the procedures used to implant these devices. For example, the average cost hospitals paid for knee implants ranged from $3,408 to $10,830, and the average paid for implantable cardioverter-defibrillators ranged from $19,578 to $35,916. There was also a substantial amount of within-hospital variation in device prices.

This sort of variation would be warranted if it were driven by different functionality needs across patients or differences in outcomes associated with one device over another. However, variation persisted even when controlling for patient characteristics that would drive functionality choices. The Value-Based Purchasing of Medical Devices project did not focus explicitly on the benefits of implantable medical devices – although these are life-saving technologies that do add value for patients, across the country we have surprisingly little data on patient outcomes associated with their implantation, and whether higher-cost devices drive better outcomes.

So what is these findings? Variation in medical device pricing is driven by the perfect storm of forces that inhibit lower prices and true market competition: these include a lack of transparency on cost; a multiplicity of agents – hospitals, physicians, device companies, health plans, and patients – and misalignment between the primary agents involved in device selection (physicians and hospitals); and a lack of transparency on the outcomes associated with these devices.

A lack of transparency on cost

A primary driver is the lack of transparency on the costs of these devices. As the GAO states in its report, a number of hospitals sign price confidentiality clauses when they purchase implantable medical devices that keep them from divulging these prices to third parties. The threat of legal action for divulging price information acts as a powerful incentive not to do so, even though understanding one’s own prices relative to others in the market could help hospitals to make more informed purchasing decisions. Is the threat credible? In the past, there have been instances of device companies attempting to enforce these clauses, but rather than focusing on the hospitals that are subject to these clauses, they have focused on data intermediaries who collect price data from multiple hospitals (a discussion of these cases is available here). Both suits were settled out of court.

In 2007, the Transparency in Medical Device Pricing Act, federal legislation designed to bring some transparency to device prices, was introduced. This act would have required device manufacturers to send quarterly reports to CMS outlining mean and median prices for devices that would then be posted on the Internet. At the time, there was debate about the utility of publishing only average prices, as well as whether this was the best response to the problem of confidentiality clauses (a good overview of the pros and cons of this option is available here).  However, these questions cannot be tested because the bill never became law.

Despite the attention paid to these developments, and the light that they put on confidentiality clauses, they seemed to have had little impact on hospital purchasing: as the GAO reports, there are still instances where hospitals are signing contracts that contain confidentiality provisions, there is still misalignment in device choice between hospitals and physicians, and there is still little price transparency in the market for implantable medical devices.

Misalignment between hospitals and physicians on device selection

In general, physicians choose which devices they wish to implant, and hospitals pay for these (before billing insurers). But these actors do not face the same incentives when it comes to the selection of implantable devices. Physicians may be driven by a multitude of factors: the desire to do what is best for the patient, relationships with device manufacturers or their representatives (financial or otherwise), or familiarity with a specific type of device. Hospitals’ goals, which include keeping their costs down, may or may not be aligned with those of the physicians that practice in their facilities (for a good discussion of these issues, click here).

In acknowledgement that these two actors may not see eye-to-eye on the issue of device selection, many organizations have undertaken efforts to engender physician-hospital cooperation in this process. This has included instituting hospital technology assessment committees, which are bodies generally comprised of physicians that practice within a hospital who make decisions on whether a new technology can be introduced, given its cost and evidence of its effectiveness (one example is UCSF’s Healthcare Technology Assessment Program). It has also included payment reform initiatives. For example, efforts to bundle payment to providers and hospitals for device-intensive surgical procedures, which will ideally engender cooperation on device selection, are under way across the country. Indeed, the findings of the Value-Based Purchasing of Medical Devices Project led IHA to undertake its own Bundled Episode Payment and Gainsharing Demonstration, which is currently being implemented in California.

Transparent data on procedural outcomes

Implantable medical devices are often introduced into the marketplace with little or no data on their effectiveness compared to similar devices, or their long-term outcomes. Without these data, it is challenging to assess whether one device is worth more than another, similar device, even when its price is known. Device registries, which collect information about clinical outcomes associated with device implantation that can then be used in decision-making, are gaining momentum (one example is the California Joint Replacement Registry), and should, in the future, help clinicians to make better evidence-based decisions.

Moving into the future

In sum, there are efforts to engender greater cooperation between physicians and hospitals and to gain better insight into the effectiveness of implantable medical devices under way in California and across the country. However, more must be done to reduce price variation in this market: none of these efforts deal in a direct way with the existence of confidentiality provisions, which inhibit competition in this market. Ideally, the attention that the GAO report brings to the issues of price confidentiality and variation will revive stakeholder interest in greater transparency and bringing down the cost of implantable medical devices.

Emma is a policy analyst at the Integrated Healthcare Association (IHA) in Oakland, California. IHA is a statewide multi-stakeholder leadership group that promotes quality improvement, accountability and affordability of health care in California. In her position, Emma supports IHA’s policy, educational, and project development roles. Emma holds joint Masters degrees in Public Policy and Public Health (MPP, MPH) from the University of California, Berkeley.

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  2. This is a fantastic article and I couldn’t agree more with your analysis here. As I see it, the medical device industry is a potentially ripe area for job growth and innovation. The newly proposed medical device tax is but another example that hinders significant development and investment within the healthcare industry. If the U.S. is to regain its competitiveness in the global economy, taxes such as these must be abolished.
    For a full summary of the tax, check out the link below: