Hip and knee implants are getting cheaper.
In fact, according to a study released by the Advanced Medical Technology Association (AdvaMed) on September 23, 2013 at their annual meeting in Washington, DC, when adjusted for inflation, hip prices dropped 23% and knee prices dropped 17% on average between 2007 and 2011.
In nominal dollars (not accounting for inflation) the AdvaMed report found that hip implant prices still dropped 12% and knees dropped 5%.
The AdvaMed-funded study, conducted by Analysis Group, Inc. and based on pricing data gathered from almost 300 U.S. hospitals by the Millennium Research Group, Inc. also looked at cardiac devices.
Declines in average inflation-adjusted prices include implantable defibrillators (24%), cardiac resynchronization therapy defibrillators (26%), pacemakers (26%), drug-eluting stents (34%), and bare metal stents (27%).
The study documents that, in spite of what The New York Times says, medical devices have been a drag on rising healthcare costs considering that they have risen at half the rate of U.S. goods and about one-fifth the rate of health care goods over the last 20 years.
The researchers examined just the cost of the implantable devices, excluding other medical-device-related costs included in surgical procedures. The study also did not account for average prices of any specific device, looking only at average hospital costs for different categories. That, says the report, suggests that falling costs may be partly attributable to changes in product mix over time, such as hospitals opting to buy cheaper or pricier versions of different implants.
“These results reaffirm previous findings that medical technology prices overall have remained consistently low for 20 years, growing at less than half the rate of prices in the overall economy—or at an average annual rate of 1% over the period compared to 2.7% for the overall CPI (consumer price index) and 4.7% for the Medical Care CPI. It’s important to note that spending on advanced medical technology makes up a consistently small and stable 6% of national health expenditures.” – Stephen Ubl, AdvaMed President and CEO.
Device Makers Respond to Value-Based Healthcare Trends
Device makers we spoke with say the decline has mostly been driven by creative responses to payer and hospital pressures on pricing and increased competition.
Medical technology companies used to drive growth with innovative products that were easier for doctors to use and could improve lives, according to a recent Pulse of the Industry report from EY, formerly known as Ernst & Young. The report continues that power has shifted away from doctors, who can no longer insist on their favorite brands, to hospitals looking for lower prices and proof that treatment leads to reduced costs and better results.
“Value-based health care is putting on pressure as everyone tries to slow health-care costs, ” Glen Giovannetti, leader of EY’s Global Life Sciences group, said in a telephone interview with Bloomberg. “There is real pressure on both utilization and price. Companies are beginning to, and we think they need to, adjust their business models in light of this.”
He told Bloomberg that device companies will need to create a new business model that focuses on an array of health-care solutions, rather than discrete pieces of technology that move through a standardized approval process, according to the report.
“Tortured” Data, Conclusions Overstated
We asked Stan Mendenhall, the editor and publisher of Orthopedic Network News to review the AdvaMed report.
Mendenhall told us the AdvaMed paper is an example of what a deceased economist friend of his used to say: “If you torture the data long enough, it will tell you what you want it to.”
“Although AdvaMed, the advocacy group for medical device manufacturers was not involved in the analysis and interpretation of the data, the conclusions support AdvaMed’s members, who collectively would like to point to ‘somebody else’ as the cause of rising medical costs. To the extent that the conclusions support AdvaMed’s position will be a barometer of how much the paper is touted at their meetings, to lawmakers, and insurance companies.”
“I cannot comment on anything other than hip and knee implants, which are two categories of devices that this paper reviewed. Their methodology included obtaining pricing information from Millennium Research Group’s market basket of 294 hospitals that submitted data to their tracking system between 2007 and 2011.”
Orthopedic Network News: Knees Up, Hips Down
“I agree with the authors’ conclusion that there has been pricing erosion in these categories in the data that I track with a smaller number of hospitals, but not to the extent reported by the authors. Between 2007 and 2011, I calculated an increase in overall knee implant costs of 6% and a decrease in hip implant costs of 7%. This had followed a decade of continual price increases between 1995 and 2006, ” continued Mendenhall.
Methodology and Conclusion Problems
Mendenhall has two basic problems with the author’s methodology and conclusions:
- The application of a medical care consumers price index (CPI) to the prices between 2007 and 2011. The CPI is a market basket of prices that the Bureau of Labor Statistics applies to determine how much prices have gone up. I am not familiar with how it applies to medical costs, and I am not aware of any healthcare providers who apply this in a contracting situation. The effect of applying the CPI is dramatic—the decrease in overall prices goes from 5% for a hip without the adjustment to 13% with the adjustment.
- The focus on specific components: The calculation of device costs for hips includes a stem, shell, head and liner; the device costs for knee include femur, patella, insert, and tray.
Although these are the bulk of the hardware costs, I have seen hospitals that have been inundated with “extra” stuff that increases the overall costs of the devices for the surgery.
Among the new introductions are cutting guides for knees which add about $1, 000 for each case, antibiotic bone cement instead of regular cement, pin guides for surgical navigation systems, disposable instruments, and biologics. I recently reviewed a case that had a “cap” of $4, 500 for knee hardware, but a $4, 500 charge for AmnioFix, a product sold by MiMedx to reduce the risk of adhesions after surgery. These “implant related” costs have increased from about 3% of costs several years ago to 6% of implant costs in 2012.
In summary, Mendenhall agrees with the authors that there has been erosion in the costs of certain categories of medical devices, and much of this erosion has been because of more aggressive negotiations on the part of hospital purchasing organizations. “However, the overall costs for the devices related to the surgery have not declined as much as claimed because of peripheral products that remain ‘under the radar.’”
Industry Dynamics
David Nexon, AdvaMed’s senior executive vice president says the dynamics of the industry will fuel innovation.
“There is tremendous pressure to make money by producing a better product so people are willing to pay for it, ” he told Bloomberg. “In this industry, that advantage doesn’t last very long, which keeps pricing very low. It’s been historically a tremendous engine to improve quality of care.”
AdvaMed’s Ubl added, “What else in health care can you say is going down in terms of price? At least in this part of health care, good old fashioned competition works well.”
Dave Dvorak, AdvaMed’s chairman, and CEO of Zimmer Holdings, Inc., told MassDevice that the new pricing report falls roughly in line with what he’s seen at Zimmer. He added that as the Affordable Care Act pushes hospitals to find ways to reduce costs, vendors fall on the chopping block, often because it’s easier to cut budgets than to drive efficiency.
He said this is a double-whammy for device makers and a reason to repeal the medical device tax.
“More pressure is being put on the hospital to absorb the financing of the healthcare reform and those hospitals turn back around and look for someone to subsidize what they believe they’re putting forth in the way of a funding mechanism, ” Dvorak said.
To read the AdvaMed study and review charts and graphs, click here.
