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Why Medical Device Manufacturers Win, and Patients Lose

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Medical device manufacturers funnel billions into their coffers while patients struggle with financial ruin after receiving routine procedures. 

By: Timothy S. Tomasik

$13,000 or $78,000.  If you needed an artificial hip, which would you rather pay?  That stark choice was recently presented to 67-year-old Michael Shopenn of Colorado.  Mr. Shopenn’s choice provided a background for Elisabeth Rosenthal’s piece in Sunday’s New York Times highlighting the wildly anticompetitive behavior of American implant manufacturers, their expensive lobbying efforts, and compliant hospital policies that combine to leave more and more Americans stuck at similar crossroads.  Mr. Shopenn chose to take his business to Belgium, where the cost of his hip replacement, including a five-day hospital stay, doctors’ fees, operating room charges, crutches, medicine, a week in rehab, and a round-trip flight, totaled $13,660.  A similar hip implant procedure at home would have cost somewhere in the ball park of $78,000.

American hip manufacturers would have consumers believe that R&D and liability litigation drives up the cost of their products.  Once again, this straw man argument has been proven blatantly false.  In 2012, hip implant manufacturers spent about 5% of revenue on research and development.  Tort liability?  Dr. Rory Wright, an orthopedist at the Orthopedic Hospital of Wisconsin discounts this theory, noting that “[implant manufacturers] price this way because they can.”

Mr. Shopenn’s choice, like so many other Americans, was influenced by his insurance company’s refusal to perform its obligation.  Specifically, his insurance refused to cover a hip implant because of a previous sports injury, claiming his devastating arthritis was the result of a “pre-existing condition.”  So, if he ever wanted to stand long enough to make coffee, let alone work, he had to pay for the procedure out of pocket.

An artificial hip costs about $350 to manufacture in the United States.  In fact, four of the five largest orthopedic manufacturers in the world call the United States home.  Three – Zimmer, Biomet, and DePuy – are just a two hour drive from Chicago, in Warsaw, Indiana.  Yet, the cheapest artificial hip Mr. Shopenn could find in the U.S. was $13,000.

What accounts for this exorbitant cost?  Device makers require their customers to sign non-disclosure agreements about prices, so institutions can’t learn what their competitors are paying.  There are as many as 13 layers of middlemen vendors – joint implant purchasing consultants, implant billing companies, joint brokers – between the physician and his or her patient, all of whom cause artificial price inflation.  Last year, the medical device industry spent nearly $30 million lobbying Congress for favorable regulation.  In 2007, joint makers paid $311 million to settle Justice Department lawsuits that alleged the manufacturers were issuing kickbacks to surgeons who used their devices.  That same year, nearly 1,000 American orthopedists received a total of about $200 million in payments from joint manufacturers for consulting, royalties and other activities.  Joint maker sales reps also cozy up to physicians and even accompany them into the operating room with unwitting patients.  Studies have shown that operations attended by a sales rep are more likely to use more and costlier medical equipment.  At the end of the day, a $350 artificial hip typically costs a hospital or orthopedic clinic between $4,500 and $7,500.  Lop on another hefty hospital markup, and the patient is left holding the bag.

Some consumers have fought back.  For instance, after concluding that hip replacements billed at $100,000 yielded no better results than less expensive ones, the California Public Employees’ Retirement System told members that it would pay hospitals $30,000 for a hip or knee replacement.  Faced with the possibility of a total loss in business, not surprisingly, dozens of hospitals have fallen in line to accept the new price point.

Ms. Rosenthal’s piece highlights the confluence of factors that contribute to the inflated price of an artificial joint implant surgery.  It also clearly illustrates, despite the outcries from misinformed legislators and conservative pundits, that tort liability is merely a drop in an ocean of considerations that have contributed to spiraling health care costs.  In reality, it is the relentless pursuit of corporate and institutional profit that leaves patients with few or increasingly extreme options to obtain the health care they need to improve their quality of life.

Patrick J. Giese contributed to this post.

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