Is More Price Transparency Needed in the Implantable Medical Device Market?

Implantable medical devices (IMD) — a broad range of items that include coronary stents, cardiac defibrillators, and hip and knee joint replacements — represent a significant share of hospital supply costs. In fact, for some procedures the cost of IMDs can be the most expensive part of an inpatient hospital stay or outpatient procedure. Medicare, of course, is a major payer for these IMD procedures and as the population ages and the demand for IMDs increases its obligation will continue to grow. In an effort to gain control of rising Medicare costs, the U.S. Senate Finance Committee recently asked the Government Accountability Office (GAO) to examine (1) how Medicare’s hospital payment systems account for the prices hospitals pay for IMDs, (2) the spending and utilization trends for procedures involving IMDs provided to Medicare beneficiaries, and (3) what available information tells us about the prices hospitals pay for IMDs and any factors that influence those prices.

How Hospitals Purchase IMDs

According to the GAO, hospitals generally buy IMDs at prices negotiated directly with manufacturers or at prices negotiated by intermediaries known as group purchasing organizations (GPO). In an earlier report, entitled “Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding Their Business Practices,” the GAO found that by pooling the purchasing power of multiple providers, GPOs may be able to obtain lower prices from manufacturers.    

Hospitals, however, face challenges in obtaining information on IMD prices in the market because comparable price information across manufacturers generally is not publicly available. In addition, device manufacturers often require hospitals to sign purchasing agreements that contain confidentiality clauses restricting them from revealing to third parties the prices they paid for medical devices. Without such competitive information, the prices hospitals pay for IMDs may be higher, resulting in higher Medicare costs. 

How Medicare Determines IMD Prices

Medicare’s payment systems use data from cost reports and claims to set prospective payment rates for inpatient and outpatient hospital procedures. The cost reports capture data on hospitals’ costs for all services and supplies, including IMDs, but do not separately identify specific IMD costs.

Compared to hospital cost reports and charges on inpatient claims, the GAO found that the data on hospitals’ outpatient claims provide more specific information about charges for individual IMDs. In addition, due to a lag in data, the cost of the newest IMD technology may not be reflected in data used to set Medicare payment rates. However, to better reflect the costs of new technology, Medicare does make additional payments under the inpatient and outpatient payment systems.

The GAO notes that CMS is taking further steps to better account for hospitals’ reported IMD prices in the data it uses to set inpatient and outpatient prospective payment rates. Specifically, CMS has modified the way hospitals report costs of IMDs on Medicare cost reports. CMS created a new cost category called “Implantable Devices Charged to Patients,” which requires hospitals to report separately their high-cost IMDs and their other lower-cost medical supplies. The revised cost report with the new cost category was made available for use for cost reporting periods beginning on or after May 1, 2009. Data collected with these revised cost reports will likely be available for setting payment rates for 2013.

Spending and Utilization Trends for IMD Procedures

According to the GAO, Medicare expenditures for IMD hospital procedures increased from about $16 billion to $20 billion from 2004 through 2009. Cardiac and orthopedic procedures accounted for nearly all IMD-related expenditures, with orthopedic procedures accounting for most of the increased IMD expenditures during this period. In addition, utilization increased at a faster rate for orthopedic devices and explained the majority of changes in expenditures for IMD procedures during the period.

From 2004 through 2009, GAO reports that utilization of IMD procedures increased from about 1.3 million to about 1.6 million claims, with inpatient IMD utilization increasing from 1.1 million to 1.2 million claims, and outpatient IMD utilization increasing from about 180,000 claims to about 363,000 claims.

Information on the Prices Hospitals Pay for IMDs

The response to a GAO data request for complete and comparable information on the prices hospitals paid for various models of IMDs was limited. The respondents identified several reasons. First, many respondents indicated that the price information they provided for at least one device did not account for all discounts and rebates obtained. Second, a number of entities stated that the majority of contracts between hospitals and manufacturers include confidentiality clauses that generally limit hospitals from sharing price information with third parties. Finally, some respondents cited data retrieval or quality issues as limiting their ability to provide detailed price information.

The price information submitted to the GAO also showed substantial variation in the prices hospitals paid for the same type of device. Among 31 hospitals that provided detailed price information on cardiac IMDs, the GAO found that for automated implantable cardioverter defibrillators (AICDs) and cardiac resynchronization therapy defibrillators (CRT-Ds) the difference between the reported lowest and highest model-specific prices was several thousand dollars.

One particular factor that the GAO found influences the prices hospitals pay for IMDs is the  relationships physicians have with IMD manufacturers. Although physicians generally are not involved in hospital price negotiations, they may express strong preferences for certain manufacturers and models of IMDs. The GAO concludes that hospitals face three barriers when it comes to considering physician preferences when making IMD decisions: (1) confidentiality clauses included in IMD contracts may bar hospitals from sharing price information with some physicians, making it difficult to give physicians the information they need to consider cost when making decisions about devices; (2) physician-hospital relationships must compete with strong physician-manufacturer relationships; and (3) some physicians might be loyal to certain manufacturers with whom they have consulting relationships.

Final Observations

To be certain, the GAO study makes it clear that more IMD price data is needed by hospitals, physicians, and Medicare.  Purchasing agreements with confidentiality clauses are a large barrier to transparency, but certainly are not unique to the medical device industry.  These clauses are widespread throughout most industries.  While manufacturers have an absolute right to insist on the confidentiality of prices in most industries, do they have that same right when the federal government is the payer?  To be a good stewart of our tax dollars the government needs this information. This lack of IMD price data makes it difficult for us to know whether hospitals are receiving the best device prices and whether Medicare is paying too much. 

During the 110th Congress, Senators Grassley and Specter sponsored legislation that would have required device manufacturers to submit the average and median sales prices of covered devices to the Secretary of Health and Human Services on a quarterly basis (S. 2221, 110th Cong. §2).  Isn’t it time to reintroduce this bill?