Getting priced out of joint replacement

Experts: U.S. market plagued by 'sticky pricing,' lack of competition

Topics: Medical and Surgical Supplies, Supply Chain, Finance, Pharmacy, Market Trends, Strategy

August 5, 2013

In the third edition of the New York Times' "Paying Till It Hurts" series, Elisabeth Rosenthal examines the rising cost of medical devices, spotlighting the major cost difference between joint implants in the United States and in other countries.

Health economists say the American health care market is plagued by "sticky pricing," in which the costs of products remain high or increase over time instead of dropping. The price of a total hip implant rose nearly 300% from 1998 to 2011, according to Orthopedic Network News (ONN). Experts attribute this to a lack of market competition or government regulation in the U.S. health care industry.

Device makers charge 'inflated' prices

For example, U.S. medical device manufacturers have grown particularly adept at commanding inflated prices for artificial implants, economists say. Although an artificial hip typically costs just $350 to manufacture in the United States, hospitals and orthopedic clinics usually pay $4,500 to $7,500 for them, according to MD Buyline and ONN.

Those numbers rise with the cost of installation equipment and the intermediaries' fees, Rosenthal writes. At one New York hospital, a patient's hip implant accounted for nearly $37,000 of a $100,000 hospital bill. Insurers negotiate discounts on those charges and patients have varying responsibility for the differences, she notes.



Moreover, the price of artificial joints has remained high even though the basic design has remained unchanged for decades, Rosenthal points out.

Although hospitals try to bargain for discounts from manufacturers, they have limited leverage because they each buy relatively small quantities and device makers typically require them to sign nondisclosure agreements about prices. That secrecy erodes bargaining power and allows middlemen to flourish, Rosenthal writes.

In addition, competition is limited by trade policies that prevent generic or foreign-made implants from being sold in the United States. At the same time, patents and a costly FDA device approval process deters start-ups from entering the market, Rosenthal argues.

Looking abroad for affordable care? U.S. vs. Belgium

Rosenthal tells the story of 67-year-old Michael Shopenn, who calls himself the "poster child" of inflated U.S. health care prices. In 2007, Shopenn was able to obtain an artificial hip directly from a medical device manufacturer at $13,000 with no markup. However, he learned that the hospital charges for the procedure would run another $65,000, excluding the surgeon's fee.

In search of a more affordable solution, Shopenn ultimately chose a private hospital in Brussels, where his hip replacement cost $13,660 including the joint, all doctors' fees, operating room charges, crutches, medicine, a five-day hospital stay, a week in rehab, and a round-trip plane ticket.

According to Rosenthal, Shopenn's joint implant and surgery were priced entirely differently than in the U.S. In Belgium, government officials oversee major medical purchases, approving dozens of different types of implants from a range of manufacturers and setting a wholesale price for each of them. The price currently averages about $3,000 and can be marked up by $180 per implant.

"The manufacturers do not have the right to sell an implant at a higher rate," Philip Boussauw—director of human resources and administration at St. Rembert's, the hospital where Shopenn had his surgery—told Rosenthal.

The University of Iowa's Peter Cram says the same cannot be said for U.S. medical device manufacturers. For U.S. CEOs, "Why charge $1,000 for the implant in the U.S. when you can charge $14,000? How would you answer to your shareholders?" he asked (Rosenthal, New York Times, 8/3).

What's the difference between 'cost' and 'cost'?

Virtually everybody agrees that health care costs are too high, but which costs are they really talking about? We define six types of "cost"—and explain why each matters to hospitals.

Read the blog post and download the infographic now.

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