Negotiating a price for something can be extra difficult if you don’t know what you should be paying.
Milwaukee-area hospital supply chain workers and purchasers face that reality every day. It’s a reality that could be costing consumers more, and contributing to the skyrocketing costs of health care in our region.
According to Joe Volpe, vice president of supply chain at Glendale-based Wheaton Franciscan Healthcare, hospitals go in to purchasing negotiations nearly blind, due to strict confidentiality clauses set by the manufacturers.
“Whether you are purchasing a car or a toaster oven you have access to pricing information that gives you a pretty good idea what you should be paying,” Volpe said. “In health care it is different.”
The confidentiality clauses that are written into their purchasing contracts forbid pricing information to be disclosed to anyone, including group purchasing organizations and other third party vendors who would normally collect that type of data and distribute it to specific regions as a pricing guide.
“This is more of a problem when we are purchasing high cost physician preference items,” said Terri Kendrick, director of purchasing at Wheaton.
Physician preference items are items like pacemakers, defibrillators, or parts used in orthopedic surgeries. Physicians in a system often prefer to work with certain types or brands of these products, Kendrick said.
Because of the confidentiality clauses within those agreements, it is very hard for hospitals to obtain any sort of idea of what they should be paying for those products.
According to Brad Levine, director of purchasing at Froedtert & Community Health, the manufacturers of these items routinely make their list product prices available for hospitals. According to Kendrick, that is true, but the list price is essentially like the sticker price on a car. Hospitals usually try not to pay that price. They try to negotiate down, Kendrick said.
“The fact is that the list price is meaningless,” Volpe said. “Many of the physician preference items are actually purchased far below list price, for example with 50 percent discounts or more. If the list price was in any way related to the cost to produce the products and a reasonable profit, you would not see this level of discounting.”
Without knowing how much hospitals pay under the list price, purchasers are still going in blind.
Froedtert & Community Health subscribes to a supply price benchmarking service that allows them to enter the items they are purchasing or considering purchasing, and it gives them a median and best price paid by hundreds of health care facilities across the country, Levine said. According to him, because the data is blinded, meaning they don’t know which hospitals paid what price, it is within the limits of the confidentiality agreement.
Wheaton Franciscan subscribes to a similar service, and according to Kendrick, language used in most standard manufacturing contracts prohibits sharing price data of any kind for all parties involved.
Similar third party data aggregators using blinded data were the subjects of lawsuits brought forth by major manufacturers in the past. In those situations the cases were settled out of court on the side of the manufacturers, and has only led to more restrictive language in the confidentiality agreements, Kendrick said.
Figure 1: This scatter graph indicates the price per unit paid by hospitals across the country
for a specific physician preference item from one manufacturer over a time period of a year.
The data shows the prices hospitals, from all over the country, paid for a specific item of
equipment from one vendor all within one year.
The number of units is indicated across the bottom, and the price per unit
is indicated on the left.
"One would expect that as the quantity of items purchased went up, the price would go
down," said Joe Volpe, vice president of supply chain at Glendale-based Wheaton Franciscan
Healthcare. "In fact, the graph demonstrates that price is only related to 'how much
they believe they can get.'"
The chart shows the lowest price paid for the item was $7,400 for a hospital that purchased
around seven; the highest price paid was nearly $13,500 for a hospital that purchased only four.
"They get away with this because there is no price transparency in the market place,"
Volpe said. "If the graph demonstrated the variation in purchase prices for automobiles, with a
much higher price scale, due to total lack of transparency, the impact on the consumer and
our economy would be both apparent and significant."
“Some vendors now prohibit third party data aggregators from including data from hospitals or systems that are under contract,” Volpe said. “(Kendrick) and I both believe that within the next year or two, the major manufactures of these products will aggressively go after the third party data aggregators and severely limit their ability to publish this type of data. The problem is that many purchasing professionals in health care seem to be oblivious to the danger.”
When Froedtert runs into vendor-based agreements that include non-disclosure language, the system either requests to have the language removed or they specifically indicate that group purchasing organizations and its third-party benchmarking service should be excluded from the non-disclosure requirement, Levine said.
“We have successfully negotiated these exceptions into many of the agreements we have in place,” he said.
According to Volpe, it is possible for some systems to negotiate those exceptions into a contract, but it is becoming increasingly difficult for systems to do that when vendors tie significant discounts to the presence of those agreements.
“One would expect that as the quantity of items purchased went up, the price would go down,” Volpe said. “In fact, the graph (Figure 1) demonstrates that price is only related to ‘how much they believe they can get. They get away with this because there is no price transparency in the market place,”
Kendrick and Volpe both argue that because of the lack of transparency, sometimes the hospital systems end up paying more for the price of the equipment than the actual surgery costs. In order to protect their bottom line, and remain a viable business some of that cost increase has to get passed on to the consumer.
Zimmer Inc., a medical manufacturer of orthopedic products, considers its pricing confidential for competitive reasons, said Bradley Bishop, company spokesman.
Bishop says Zimmer products help control the cost of health care in the country.
“We believe surgeons are in the best position to determine what treatment or product is appropriate for each patient,” he said. “Our products help control the overall costs of health care, typically enabling patients to return to their active, productive lives.”
A spokesperson for MedTronics, another major manufacturer of medical technology devices including pacemakers, confirmed that the company does enter into confidentiality agreements as part of the contract process. According to the spokesperson, it is done at the request of the customer who may be able to gain a competitive advantage in their market depending on the price agreement.
Other key manufacturing players including, Massachusetts-based Boston Scientific and London-based Smith & Nephew Inc, did not immediately return a comment. Stryker, a broadly based medical technology company and Johnson & Johnson Services Inc., declined to participate in the interview.
Health care providers need to work with physicians and suppliers to reduce costs, Levine said.
“The key to obtaining the best price on physician preference items has been and continues to be a collaborative effort between physicians and our supply chain purchasing team,” he said. “Partnering with physicians to obtain the products that provide the best quality outcomes at the best possible price are a pre-requisite to providing appropriate care and keeping the organization financially viable.”
A few years ago, physician preference items were 40 percent of Wheaton Franciscan’s supply costs. This year, it was up to 60 percent, Volpe said. If things continue the way they are, by 2012 supply costs in health care will exceed labor costs, he said.
“Health care reform is flooded with the demand for transparency,” Volpe said. “These manufacturers have very little pressure on them to be efficient. Patients bare the brunt of these costs, and the demand for transparency in today’s discussion of reform should apply to this situation as well.”
