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Imperium Watch: The Price Tag on Sickness

With medical equipment as well as drugs, the devil is in the markup.

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Tuesday, March 12, 2013

A story you can’t afford not to read is Time’s “Why Medical Bills Are Killing Us” by Steven Brill, a special report published March 4. There aren’t many of us who can’t identify, either through our own experience or that of friends, with the questions Brill poses, questions like: “Why should a trip to the emergency room for chest pains that turn out to be indigestion bring a bill that can exceed the cost of a semester of college?”

One of the merits of this strenuously researched article is that it offers eye-opening information not only about drug prices, but about a less publicized cost driver that pushes patients toward bankruptcy: medical equipment.

A lot has been written about the fact that Americans pay much more for medicines than people in other countries (though for all the ink that’s been spent on the subject, not much has been done about it). Researchers at Harvard School of Public Health have long since proved that the drugmakers’ claims that high profits are needed to fund research range from exaggerated to false. But the markups on medical equipment, and the conflicts of interest involved in its sale and use, deserve more coverage than they’re getting.

Brill’s case in point involves “Steve H.,” who went to a hospital for treatment for back pain. His doctor implanted a neurostimulator manufactured by Medtronic, a company that makes pacemakers, stents, and implants to treat many conditions, from Parkinson’s to stress incontinence. The wholesale price of the device was “about $19,000,” Brill learned. But the hospital charged Steve H. $49,237. From Medtronic’s SEC filing for last fall, Brill unearthed the fact that the company sells its products for 75 percent more than it costs to make them.

The cost of equipment, and its relation to the costs of procedures, also figures in a chapter on Japanese healthcare in T.R. Reid’s The Healing of America (2009). In response to a government-imposed cap on the cost of MRI exams, Reid explained, Japanese doctors approached Toshiba, Hitachi and other manufacturers and demanded basic MRI machines that would be inexpensive enough to be cost-effective for clinics. The Japanese companies produced simple scanners that cost about $150,000 each, while American-made machines cost 10 times that much. So in Japan at that time, an MRI scan cost $105, while in the U.S. it cost about $1,000 to $1,500.

Defense analyst Chuck Spinney, who early in the millennium outed the incestuous deals that drove up the price of military equipment, talked about an aspect of the defense business he called “the self-licking ice cream cone.” The same thing happens with medical equipment, from dialysis machines and wheel chairs to implanted devices. Many medical equipment companies have doctors as owners or investors; the incentive is there for them to order procedures that use equipment sold by the companies in which they have a financial interest.

And yet another incentive may be built in when so-called “physician-owned distributors (PODs)” of implant devices and other products sell to hospitals—hospitals that may want patient referrals from the doctors who own a particular company. A congressional inquiry about PODs in 2011 found that at one hospital, spinal fusion procedures increased by 300 percent after a POD dealing in “spinal products” moved into the area where the hospital was located.

In January, the Journal of the American Medical Association reported that something similar was happening with cardiac defibrillators (also made by Medtronic, among other manufacturers): more than 20 percent of patients who were given them didn’t meet medical criteria for having them. The Justice Department is investigating.

But there is good news. A two-year experimental bidding program for medical equipment conducted by Medicare in certain districts around the country is said to have cut the price of some medical equipment by 42 percent, saving the program $200 million.

And beginning in March, 2014 the “Sunshine” provisions of the Affordable Care Act will require manufacturers of drugs, devices and medical supplies covered under Medicare, Medicaid and CHIP (the Children’s Health Insurance Program) to report payments they’ve made to physicians--including stock options and other things of value as well as cash—and ownership and investment by physicians in their companies, to the government. The information will become public in September, 2014.•

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