Surgical implants – why the ‘price’…isn’t

As states take on the growing problem of surgical implant costs – the latest (and arguably greatest) effort by certain providers to reap huge profits from workers comp payers and employers, it’s time to delve into the problem – and why a ‘solution’ isn’t near as simple as we’d like.
First, how much are we talking here?
The current world-wide market for orthopedic implanted devices (a subset of the larger implant market) is in the $17 billion range, and growing at just under 10 percent a year. IN California alone, a RAND study indicated work comp payers alone are overpaying about $60 million a year for surgical implants. My guess is work comp payers are paying for a much greater percentage of implants than their overall 1.5% of the US health care market would indicate.
Spinal implants are a particularly popular item in comp – for details on this click here.
This isn’t new news; back in 2008 I posted on what was then a rapidly-growing problem. It’s taken till now for many payers to attempt to solve the problem, but their solutions are what I’d characterize as ‘first-generation’.
Payer solutions to date have relied on two general approaches – basing reimbursement on the ‘invoice’ and/or a payer-specific database of historical reimbursement for devices. Of course state fee schedules also play a large role. To the extent a fee schedule addresses implants, the methodology is usually based on some variety of invoice-based pricing, such as the manufacturer’s price to the hospital/facility plus a markup plus shipping and handling.
Logical, right? Transparent, right? Simple, right?
No.
Payer databases are derived from historical billing information, information that (as I’ll illustrate below) is likely highly inaccurate. Therefore, basing reimbursement for the next device on past devices is fatally flawed.
Why?
In several jurisdictions (including NY TX CA (working on a change) and FL) the basis for reimbursement is some version of the “documented paid amount” plus a handling fee of 10% or so up to a cap of a few hundred dollars (CA) or a percentage of the invoice amount (FL). Illinois is also contemplating a similar arrangement.
The problem lies in the documentation of the paid amount. Most payers ask for a copy of the invoice, which, on the surface, makes sense – this is what was paid.
Not exactly. What the invoice doesn’t show can include:
– volume purchase discounts
– rebates
– “3 for the price of 2” deals
– waste (some surgeons use the cage from one kit and screws from another, so the payer is paying for more hardward than is actually being used)
internally developed invoices (documents prepared not by the supplier but by the provider)
This last point is the crux of the issue.
Hospital systems often buy in bulk, with several implant kits shipped and billed; this obviously makes it impossible for the provider to produce the invoice for the device used in a specific surgery, as they never got one. Thus, many providers develop the invoice for a specific implant kit themselves.
There’s another problem with implants – when they are defective, the patient has to go back in for more surgery. And the WC insurer has to pay. The only way to mitigate risk is to track the model and manufacturer for each implant – yes, it’s work, and yes, it’s work worth doing.
Finally, even the original invoice is for a device with a markup that is, well, huge. One analyst estimates gross margins are in the 80% range…driving profit margins that are the envy of any payer or health system.
(table from 600bn.com)
Industry-EBITDA-margins.jpg
Are we ready to get serious? According to a knowledgeable source, “At the end of the day, someone has to decide that ‘enough is enough’ – we won’t continue to pay more every year for orthopedic procedures unless we get vast improvements in patient care in return. Both Medicare and private payors appear like they might finally smell the proverbial blood in the water.”
Here’s hoping regulators and payers alike are also getting on the scent.

What does this mean for you?
Don’t reimburse based on the invoice. Period.

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