New Studies Defend Medical Device Pricing Practices

The findings of two new studies call into question the necessity and likely effectiveness of proposed legislation targeting the pricing practices of medical device manufacturers. The studies, both funded by industry association AdvaMed (Washington, DC), defend current medical device pricing procedures as being effective and necessary in promoting optimal patient care at a reasonable price.

Disputing Price Transparency Efforts

One of the studies—titled Is Greater Price Transparency Needed in the Medical Device Industry?—was released February 19 by author firm Criterion Economics (Washington, DC). It specifically targets the Transparency in Medical Device Pricing Act (S 2221), which was cointroduced last October by Senators Arlen Specter (R–PA) and Charles Grassley (R–IA). If the bill becomes law, it would require medtech manufacturers seeking payment under Medicare and related programs to issue quarterly reports on the average and median sales prices for all of their implantable medical devices used in inpatient and outpatient procedures. Manufacturers that fail to report or misrepresent pricing data would be subject to fines up to $100,000.

Advocates of the legislation contend that greater price transparency would serve as a way to empower patients and bring down healthcare costs. However, the authors of the new study, Robert W. Hahn and Hal J. Singer, concluded that the pending legislation is unlikely to have the intended beneficial effect.

“We found that mandatory price disclosure, as proposed in S 2221, is unlikely to benefit patients or hospitals and, worse, will likely increase costs,” said Hahn, who serves as executive director of Reg-Markets Center (Washington, DC) and is a senior fellow at the American Enterprise Institute (Washington, DC). Singer is president of Criterion Economics (Washington, DC).

In developing the report—available at www.criterioneconomics.com/docs/Hahn_Singer_Disclosure_final_12-7.pdf—Hahn and Singer reviewed previous government attempts to impose price disclosure rules in a number of other industries. In doing so, they identified conditions that must be satisfied if mandatory price disclosures are to result in large benefits to consumers or other purchasers.

Subsequently, in examining the specific characteristics of the medical device industry, the authors determined that the conditions required for price disclosures to have a favorable effect are not met in the context of the overall healthcare system. For example, the study concluded that medical device pricing disclosures under S 2221 would not provide current price information since the data would be at least three months old. Furthermore, the structure of the healthcare industry would not ensure that hospitals pass cost-savings on to consumers.

In addition, the report found that the medical device industry meets certain conditions that are likely to result in large cost increases as the result of pricing disclosure. For example, the report noted that there is a high degree of concentration among manufacturers of certain medical devices.

Most segments of the medical device industry are characterized by a significant degree of seller concentration. For example, the vast majority of drug-eluting heart stents in the United States are currently sold by only two firms: Boston Scientific and Johnson & Johnson. Similarly, the ICD industry is represented by just three firms: Medtronic, Boston Scientific, and St. Jude Medical. The U.S. orthopedic joint replacement industry, which had approximately 14 firms compete for total sales of $5.1 billion in 2006, appears at first glance to be less concentrated. A closer examination reveals, however, that five firms account for approximately 90% of all sales. Furthermore, medical device industries are likely to remain highly concentrated because they are protected by significant technological barriers to entry [p. 25].

Likewise, the report notes that there are few, if any, substitutes for many medical devices. Also, many medical device manufacturers do not already know their rivals' prices, the study noted.

Competition as a Control

Meanwhile, a second study—released just days earlier by AdvaMed—reports that the highly competitive nature of the medical device industry has limited the rate at which medical device prices are increasing. The association points to the study as further proof of the role that medical technology plays in managing—rather than exacerbating—rising healthcare costs .

“The report's findings are significant in light of recent comments by some suggesting policies to limit the diffusion of and access to advanced medical technology in response to cost pressures,” said Edward J. Ludwig, AdvaMed board chairman and chairman, president, and CEO of Becton Dickinson (Franklin Lakes, NJ). “Simply put, medical technology is part of the solution to managing healthcare expenses, and limiting patient access to life-saving, life-enhancing technologies compromises patient health and may actually increase costs.”

Between 1989 and 2004, spending on medical devices and in vitro diagnostics remained relatively constant as a proportion of total national health expenditures, according to the study. During the same period, medical device prices grew far more slowly than the medical consumer price index or the overall consumer price index.

“The innovative and competitive nature of the medical technology sector benefits patients by providing continual improvements in care,” said Michael A. Mussallem, chairman and CEO of Edwards Lifesciences (Irvine, CA) and AdvaMed's board chairman–elect. “This study shows that there is also an economic benefit of competition due to the relatively slow rate of growth in overall industry prices.”

In 2004, the latest year studied, national spending on medical devices and in vitro diagnostics totaled $112 billion, or 6% of total national health expenditures. During the 15-year study period, medical device spending as a share of total expenditures never rose above 6.1% and never fell below 5.4%.

Over the full study period, medical device spending increased at an average annual rate of 8.1%, compared with a 7.4% annual growth rate for overall national health expenditures. But despite the faster growth rate of medical device spending, medical device price increases have been modest at an average annual rate of 1.2%. During the same period, the medical consumer price index grew at an annual rate of 5%, and the overall consumer price index grew at a rate of 2.8%.

“The report's findings are clear: the highly competitive medical device marketplace is working and delivering tremendous value both in patient care and in economic terms,” said Stephen J. Ubl, president and CEO of AdvaMed. “Policies that stifle innovation, interfere in the marketplace, or limit access to care threaten that success.”

The study, available here, was written by Roland Guy King and Gerald F. Donahoe. King is an independent consulting actuary and an industry leader in public sector health financing programs. Prior to 1995, he served as chief actuary for the Health Care Financing Administration for 16 years. Donahoe is a retired economist who worked as a statistician at the Bureau of the Census from 1962 to 1971 and with the Bureau of Economic Analysis at the U.S. Department of Commerce from 1971 to 1997.

© 2008 Canon Communications LLC

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