By Jeffrey Binder
On August 4, the New York Times ran the latest installment in its series on healthcare costs in the U.S. titled "In Need of a New Hip, but Priced Out of the U.S."
The story, written by Dr. Elisabeth Rosenthal, profiles a U.S. patient whose insurance company refused to pay for hip replacement surgery. A local hospital quoted the patient a price of $78,000 for the surgery, excluding physicians’ fees. The patient ultimately went to Belgium for the surgery and paid $13,660.
It’s a very interesting situation and worthy of exploration. Why would a hospital quote an uninsured patient such a price? And what could explain the roughly $65,000 gap in surgery cost between the two countries?
In her analysis, Dr. Rosenthal’s primary concern appears to be the cost of the implant used in the surgery, which she claims was priced at $8,000 in the United States but $4,200 in Belgium. The U.S. price, if $8,000, would have been well above the national average for primary hip replacement implants.
However, even if we accept the author’s information as correct, the $3,800 cost differential explains a mere 6% of the $65,000 gap.
Nonetheless, the author chooses to ignore the 94% of the gap that has nothing to do with the implant cost, and steers readers to the unfounded conclusion that U.S. implant manufacturers bear responsibility for escalating U.S. healthcare costs.
The impact of implant pricing on hospital payment
The author does not inform the reader that U.S. hip implant prices have declined for several years, while payments to hospitals for hip replacement surgery have increased.
From 2010-2012, the average hospital cost for primary hip implants declined 8%.1 This decline is part of a longer-term downward trend. From 2006-2012, primary hip implant prices declined 13%, and market analysts expect continued declines for the foreseeable future.1
From 2010-2012, hospital payment from private insurers increased 16%.2
Thus, in 2012, only 16% of the cost of hip surgery reimbursed by private insurers was consumed by the hospital’s cost for the implant, down from 20% in 2010.
It’s important to note that the price a hospital pays to a manufacturer for any given implant does not vary by payor – Medicare versus private. Manufacturers simply bill each hospital the agreed-upon price for each patient and the hospitals, in turn, bill the payor for all of their services, including the cost of the implant.
Thus, as implant costs have declined, they have also consumed a shrinking proportion of Medicare hospital reimbursement and now represent less than half of this payment.1,2,3
What these data further reveal is that the $78,000 hospital quote for a hip replacement mentioned earlier is clearly an outlier–it is greater than twice what hospitals collect on average from private insurers and nearly seven times Medicare’s typical reimbursement.
There is no indication in the article that the author asked the hospital why it would charge such a high price to the patient when it is clear that hospitals accept far less from Medicare and from private insurers.
If the facts don’t fit the theory…
Because Dr. Rosenthal is intent on blaming manufacturers for the magnitude and variation of hospital charges to patients, she creates a tangled web of unsubstantiated arguments to support her conclusion.
"Thirteen layers of vendors"? Who are these people?
The author claims that there are "as many as 13 layers of vendors between the physician and the patient for a hip replacement," and that this, along with the cost of "installation equipment," explains why in one instance a hospital charged a payor $37,000 for a hip implant.
We have no idea to which vendors she might be referring. Any costs associated with our local distributors’ sales and service and with the "installation equipment" she describes (necessary product-specific instruments used by the surgeon) are included in our price to the hospital.
Lack of competition?
The article makes several comments about the state of competition in our industry, including that "some economists" refer to the orthopedic manufacturing industry as a "cartel."
A cartel is defined as "an association of manufacturers that maintains prices at a high level and restricts competition." This is a serious and irresponsible charge, one which implies criminal activity and which is demonstrably false. Biomet and our competitors compete aggressively in the market place, as is evidenced by the price declines that we have seen.
The author ultimately contradicts herself, pointing out that one orthopedic hospital has driven down the cost of joints by more than 30%. So which is it: a cartel-dominated market where individual hospitals have no leverage, or a competitive market where a single hospital has the power to drive down implant pricing by more than 30%?
"Ferociously" blocking foreign companies?
The author states that "generic" and foreign-made implants have been kept out of the United States. This is simply untrue. Numerous foreign companies compete in the U.S. market. How, for example, has UK-based Smith & Nephew achieved success in the U.S. if these barriers exist? Why would Chinese company MicroPort BV announce on June 18 its acquisition of Wright Medical’s hip and knee business?4
A review of the FDA database would have revealed to the author that just since 2012 the agency has cleared 63 new hip replacement products, manufactured by 17 companies. Thirty of the products are from companies headquartered outside of the United States.5
In regard to the authors’ contention that it is difficult for "generics" to reach the U.S. market, there are no special barriers to "generics;" all companies must comply with the same FDA requirements for marketing devices in the U.S. Surely Dr. Rosenthal would not suggest lower safety standards for these devices.
Surgeon involvement with manufacturers
Dr. Rosenthal suggests that manufacturers’ relationships with orthopedic surgeons might serve to prop up prices. However, she offers no theory or evidence as to how these relationships might impact pricing, which is, in any case, declining.
Orthopedic manufacturers require access to the expertise of, in the author’s words, "a tiny percentage" of orthopedic surgeons, whom we compensate at fair market value to assist in product development, training and education, and clinical studies.
Surgeon participation in implant development and evaluation is absolutely necessary, completely legal, and, with the advent of the Sunshine Act, will be fully transparent. Does the author seriously believe it is preferable to develop implants without surgeon input?
Attacking the miracle-workers
The author correctly states that total joint replacement surgery is a "miracle for many," but uses misleading, out-of-context anecdotes to suggest over-payment to the very hospitals, surgeons, and medical technology companies that create the opportunities for these miracles.
In the case of Medicare, payments to hospitals and surgeons have not kept pace with inflation. Surgeons have been particularly hard-hit. Medicare pays surgeons only $1,454,6 13% less than 1996 rates in constant dollars,12 and 41% less in inflation-adjusted dollars, for performing a surgery that restores many patients to pain-free mobility and contributes to improved general health and life expectancy.8-10 The government is receiving a tremendous bargain and surgeons are getting ripped off.
Ongoing policy discussions threaten further reductions in surgeon reimbursement, which could constrain patient access to these highly effective procedures. Policymakers need to recognize that they’re getting a good deal, and not create false, short-term savings at the expense of patient access to timely, cost-effective treatment.
The importance of innovation
The author states that the "…basic design of artificial joints has not changed for decades."
Using the most simplistic definition of "basic design," the same could be said for pretty much any product. One could argue that automobiles haven’t changed in "basic design" since 1886. Obviously, there’s a bit more to it, as the author herself points out in another self-contradiction:
When joint replacement surgery first became widely used in the 1970s, it was reserved for older patients with crippling pain from arthritis, to offer relief and restore some mobility. But as technology and techniques improved, its use broadened to include younger, less debilitated patients…some use more durable materials so that a patient requiring a hip implant at age 40 or 50 might rely on it longer than the standard 20 years, while other models are streamlined and require smaller incisions.
In 1992, fewer than one-third of total joint patients were younger than 65.1 Today, nearly half of patients are younger than 65.8 As retirement age and life expectancy have increased, so have patients’ expectations of leading active, productive lives. Implant technology has met these rising expectations, delivering more durable materials, less invasive tissue-sparing techniques designed to contribute to faster recovery, and solutions that better match patients’ unique anatomies.
Profitability of implant manufacturers: is it too much?
The author states that it costs $350 to manufacture a hip, but this is an inaccurate portrayal of manufacturing costs. She might have checked publicly available financial statements which, in the case of Biomet, show that we spend 30 cents of every revenue dollar on the cost of producing the products we offer. After all of our costs are taken into account, Biomet’s reported adjusted net income is 12 cents on the dollar, after taxes.11
Yes, we are a profitable company. But our team members are passionate about working in the medical device industry precisely because we know that economic success is possible only when we have successfully helped our customers transform the lives of patients. If our products do not meet the needs of our customers or their patients, they simply will use something else, and our profits will diminish. Sustained profitability is an indication that a company is doing its work well.
Why not cap prices? A solution in search of a problem
Having arrived at the wrong diagnosis, the author seems to suggest the wrong treatment: implant pricing restrictions, as are present in Belgium.
However, from a public policy perspective, where is the issue? According to the author’s own information, the cost of the surgery in Belgium was about equal to what the U.S. Medicare system pays today.
Further, as we have shown, pricing of implants is not driving hospital or payor cost. Implants prices are declining. In the U.S., price controls are a solution in search of a problem.
Of greatest concern is the impact such market intervention would have on patients. As night follows day, price or profit controls would curtail the pursuit of promising (but costly to develop) new technologies with the potential to improve care and outcomes. Those companies that survived would race for the bottom, striving only to provide static technology as cheaply as possible.
Should all this come to pass, the author may indeed wake up to what she fears most: an industry lacking in innovation, dominated by huge companies that have the reach and scale to pump out inexpensive products, but failing to move science forward in the pursuit of improved patient care. We fail to see how this would be preferable to what we have today: a robust, innovative industry teeming with passionate entrepreneurs who compete fiercely with larger companies on technology, innovation, service, and price.
As for our company, we will succeed by applying technology and innovation to address unmet patient needs, and not by freezing the standard of care at today’s levels. We agree with the author on very little, but do believe as she does that joint replacement is a miracle for many patients. We will continue to work at improving the performance of our products and services on behalf of our customers and the patients that we mutually serve.