NCPA - National Center for Policy Analysis

Hospitals Overpay for Devices

February 9, 2012

A new government report by the Government Accountability Office highlights large discrepancies among the prices hospitals pay for medical devices.  The report, which surveyed 31 hospitals, found that prices often varied by thousands of dollars.  This is particularly troubling because the reimbursement that hospitals receive from Medicare is based at least in part on the costs incurred during the procedure, says the Wall Street Journal.

  • For example, the survey found that implantable cardioverter defibrillators typically cost between $16,445 and $19,007, but one hospital paid a price that was out of this range by $8,723.
  • Medicare spent $19.8 billion on procedures involving implantable devices in 2009, up from $16.1 billion in 2004.
  • A 2011 report sponsored by the Advanced Medical Technology Association found that spending on a wide range of devices and nondrug supplies hovered between 5 percent and 6 percent of total health spending from 1989 to 2009.

High prices have been allowed to continue in large part because the decision to use a particular device has often been left to the physician instead of the hospital.  This creates an agency problem, wherein decisions regarding costs are not made by the payers (the patient, the hospital or the insurer), but by an agent who has no incentive to be frugal.  Nevertheless, this trend is gradually being reversed.

  • Hospitals are increasingly directly employing their physicians, thereby gaining leverage over them and encouraging cost-reducing decisions.
  • This forces suppliers to focus their pitches to hospitals instead of doctors -- a change that drives down prices.

This may have a long-term effect that will beat back at the forces that have placed an upward pressure on prices in the first place.

Source: Christopher Weaver, "Study: Hospitals Overpay for Devices," Wall Street Journal, February 3, 2012. "Lack of Price Transparency May Hamper Hospitals' Ability to Be Prudent Purchasers of Implantable Medical Devices," Government Accountability Office, January 13, 2012.

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