Why Cost Control for Medical Devices Is Likely To Fail.

As Ezra noted earlier this week, much of the reason that American health care is so expensive is because we pay so much per-unit of care, whether it's a prescription or a CT scan. In order to insure health care remains affordable and that reform is sustainable in the long term, these costs need to be brought under control -- a point conservatives, to their credit, have repeatedly raised. Democrats have tried to address the issue by trying to extract savings and price-control measures from groups like the drug industry, given the federal government's buying power through entitlement programs like Medicare. But, as The New York Times points out today, there's at least one area in which rapidly escalating costs will be far more difficult to constrain: the medical device industry. And it's not certain that the current health-care legislation will be able to make a big difference.

At the heart of the problem is that device makers, unlike the drug industry or health providers, don't receive Medicare payments directly from the government. Instead, as the Times article explains, the government gives a flat fee to hospitals, who are left to negotiate individually with device makers and manufacturers. Hospitals, however, often have little data to be able to gauge the relative effectiveness of different devices. Moreover, they're often contractually prohibited from disclosing how much they end up paying. As a result, hospitals -- and public entitlement programs -- end up relying on devices whose cost can vastly outstrip their value.

What's more, given the current fee-for-service model, hospitals themselves can also profit from inflated prices. In a separate Times story, David Leonhardt reveals how the Intermountain hospital chain managed to negotiate a significant price reduction for a certain medical device but still decided to charge patients -- and insurers like Medicare -- the old price:

A few people in the meeting were clearly bothered by this. They asked the finance executive, participating by speakerphone, if anything could be done. One committee member argued that Intermountain (which is nonprofit) should not overcharge for a treatment, even if it helped the hospital cover its overall expenses. The finance executive replied, apologetically, that changing the reimbursement rate would cost Intermountain millions of dollars and that there did not seem to be any way to make up for the loss.

Unfortunately, the current health-care legislation doesn't do anything to change this payment system, and legislators decided not to hit up hospitals themselves on the issue of medical-device payments. Unable to use Medicare price negotiations as a point of leverage, Congress ended up having to use a sledgehammer instead of a scalpel: they imposed a direct $40 million tax on the device industry itself. The device lobby lashed out and immediately rounded up a slew of Democratic legislators to protest the tax on the grounds that it would stifle innovation and job creation in their home states. And it seems like the device lobby has won: the House decided to halve the tax to $20 million, and the Senate is likely to follow suit.

Given the fact that medical-device costs are rising even faster than drug costs, such a measure hardly seems like it will squeeze adequate savings from the industry. It is a small consolation, at least, that the bill's comparative-effectiveness research will enable hospitals to make better cost-value judgments. But, in the end, it doesn't seem like it will be enough to fix a faulty, bloated payment system.

--Suzy Khimm


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