The $1600 Screw and Other Outrages

The New York Times published a detailed story about the device industry, focused on orthopedics. Some of its key points were:

The pricing of orthopedic devices is a closely guarded secret.

Prices paid by hospitals vary widely, yet information is so scarce that hospitals say they are often unaware if they are overpaying, and impotent to negotiate a better price.
In the modern health care market, prices and fees are increasingly determined by negotiation. Yet when it comes to implantable devices, that dynamic often barely exists.

The hospital managers seem clueless about the costs of devices.

Part of the blame lies with the hospitals, which often seem to lack the financial sophistication to negotiate lower prices for the devices. While hospitals have been succesful at cutting costs for standard supplies like light bulbs and bandages, many hospital's accounting systems are so inadequate that they have little idea what they actually pay for more complex devices.

What information is available suggests that the devices are often variable, but very expensive.

With manufacturers guarding pricing information closely, the price of a given device may vary by thousands of dollars from one hospital to the next. One hospital in the New York area, for example, paid $8000 more for a DePuy hip than a competitor.... The price of the latest artificial knee approaches $10,000. A single screw used in spinal surgery can cost as much as $1,6000.

The companies that make devices are very profitable

Rising prices have made device companies unusually profitable: according to an analysis by Medicare, they enjoyed net profit margins of nearly 20 percent at the end of 2003; more than tice the average for the Standard & Poor's index of 500 companies.

Extensive company marketing efforts aimed at physicians have lead to major conflicts of interest.

For the device company, the most important relationship is with the doctors, and they spend considerable money and energy nurturing it.
The extent and precise nature of the relationships remain largely hidden. The companies and doctors are unwilling to discuss specific arrangements. Hospitals are often unaware of them....

The Times reported on the case of one Dr. William Overdyke of the Louisiana State University Health Sciences Center in Shreveport, LA.

[He] oversaw operations to replace worn-down knees. From 2000 through the middle of 2001, whenever a patient needed an artificial knee, he or the residents he supervised implanted one made by Sulzer Medical....

Dr. Overdyke has said he used the Sulzer implant because it was the best available. But Louisiana state officials say he had another incentive as well: the $175,000 a year that he stood to make from contracts with the company. The contracts called for him to consult on product design and 'promote and educate other surgeons' on the virtures of Sulzer products.

Before signing with Sulzer, Dr. Overdyke said, he had never used the company's artificial knee. Earlier he had a contract with another company, Wright Medical. And during that time, he and his residents largely used Wright's artificial knees.

Dr. Overdyke paid $10,000 in fines after investigators determined that his consulting arrangements with Sulzer were an improper conflict of interest under the state ethics code.

Some hospitals are now insisting on more transparency.

The hospital industry says that one essential factor for ending the cost spiral is the free exchange of information about prices.

But the industry does not agree.

These efforts at transparency are drawing fierce resistance. A major device maker Guidant, has sued two consultants, including a unit of MedAssets, accusing them of sharing confidential price information . Med Assets countersued, saying Guidant has tried to buy doctor's loyalty through consulting agreements and other inducements.

Yes, that's the same Guidant that has been prominently featured in Health Care Renewal because of allegations it hid information about the failure rate of its implantable cardiac defibrillators. (See recent post here, with a link to earlier posts.)
So here we have the classic Health Care Renewal mix: clueless hospital administrators, physicians with large conflicts of interest fueled by commercial interests, secrecy and censorship, and ridiculously high prices.
All that is missing are the roles of managed care organizations/ insurers and the government. They set the rates the will reimburse hospitals and physicians for procedures that implant orthopedic devices. They could try to find out what prices are charged, what the devices might actually be worth in some sense, and then exert downward pressure on reimbursement rates where appropriate. It is, of course, managed care and the government who always complain about high costs. But here they seem to be doing nothing about them.
But someone will probably find a way to blame generalist physicians for the whole mess.