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Originally published August 3, 2013 at 6:16 PM | Page modified August 5, 2013 at 7:17 AM

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Here’s why U.S. patients pay inflated prices for new hips, knees

As the United States struggles to rein in its growing $2.7 trillion health-care bill, the cost of medical devices such as joint implants, pacemakers and artificial urinary valves offers a cautionary tale.

The New York Times

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WARSAW, Ind. — Michael Shopenn’s artificial hip was made by a company based in this Indiana city, a global center of joint manufacturing. But he had to fly to Europe to have it installed.

Shopenn, 67, an architectural photographer and avid snowboarder, had been in such pain from arthritis that he could not stand long enough to make coffee, let alone work. He had health insurance, but it would not cover a joint replacement because his degenerative disease was related to an old sports injury and thus considered a pre-existing condition.

Desperate to find an affordable solution, he contacted a sailing buddy with friends at a medical-device manufacturer, which arranged to provide his hospital with an implant at what was described as the “list price” of $13,000, with no markup. But when the hospital’s finance office estimated the hospital charges would run an additional $65,000, not including the surgeon’s fee, he knew he had to think outside the box.

“That was a third of my savings at the time,” Shopenn said recently from the living room of his condo in Boulder, Colo. “It wasn’t happening.”

“Very leery” of going to a developing country such as India or Thailand, which both draw medical tourists, he chose to have his hip replaced in 2007 at a private hospital outside Brussels, Belgium, for $13,660. That price included not only a hip joint, made by Warsaw, Ind.-based Zimmer Holdings, but also all doctors’ fees, operating-room charges, crutches, medicine, a hospital room for five days, a week in rehab and a round-trip ticket from the United States.

“We have the most expensive health care in the world, but it doesn’t necessarily mean it’s the best,” Shopenn said. “I’m kind of the poster child for that.”

A 5-company cartel

As the United States struggles to rein in its growing $2.7 trillion health-care bill, the cost of medical devices such as joint implants, pacemakers and artificial urinary valves offers a cautionary tale. Like many medical products or procedures, they cost far more in the United States than in many other developed countries.

Makers of artificial implants — the biggest single cost of most joint-replacement surgeries — have proved adept at commanding inflated prices, according to health economists. Multiple intermediaries then mark up the charges.

While Shopenn was offered an implant in the United States for $13,000, many privately insured patients are billed two to nearly three times that amount.

An artificial hip, however, costs only about $350 to manufacture in the United States, according to Dr. Blair Rhode, an orthopedist and entrepreneur whose company is developing generic implants. In Asia, it costs about $150, though some quality-control problems could arise there, he said.

So why are implant list prices so high, and rising more than 5 percent a year?

In the United States, nearly all hip and knee implants — sterilized pieces of tooled metal, plastic or ceramics — are made by five companies, which some economists describe as a cartel. Manufacturers tweak old models and patent the changes as new products, with ever-bigger price tags.

Generic or foreign-made joint implants have been kept out of the United States by trade policy, patents and an expensive Food and Drug Administration (FDA) approval process that deters startups from entering the market.

The “companies defend this turf ferociously,” said Dr. Peter Cram, a physician at the University of Iowa’s medical school who studies the costs of health care.

Though the five companies make similar models, each cultivates intense brand loyalty through financial ties to surgeons and the use of a different tool kit and operating system for the installation of its products. Orthopedists typically stay with the system they learned on.

The thousands of hospitals and clinics that purchase implants try to bargain for deep discounts from manufacturers, but they have limited leverage since each buys a relatively small quantity from any one company.

In addition, device makers typically require doctors groups and hospitals to sign nondisclosure agreements about prices, which means institutions do not know what their competitors are paying. This secrecy erodes bargaining power and has allowed a small industry of profit-taking middlemen to flourish: joint-implant purchasing consultants, implant billing companies, joint brokers.

There are as many as 13 layers of vendors between the physician and the patient for a hip replacement, according to Kate Willhite, a former executive director of the Manitowoc Surgery Center in Wisconsin.

Hospitals and orthopedic clinics typically pay $4,500 to $7,500 for an artificial hip, according to MD Buyline and Orthopedic Network News, which track device pricing.

But those numbers balloon with the cost of installation equipment and all the intermediaries’ fees, including an often hefty hospital markup.

The basic design of artificial joints has not changed for decades. But rising volume — about 1 million knee and hip replacements are done in the U.S. annually — and competition have not lowered prices, as would typically happen with products like clothes or cars. “There are a bunch of implants that are reasonably similar,” said James Robinson, a health economist at the University of California, Berkeley. “That should be great for the consumer, but it isn’t.”

“Sticky pricing”

The American health-care market is plagued by “sticky pricing,” in which prices of products remain high or even increase over time instead of dropping.

The list price of a total hip implant increased nearly 300 percent from 1998 to 2011, according to Orthopedic Network News, a newsletter about the industry. That is a result, economists say, of how American medicine generally sets charges: without government regulation or genuine marketplace competition.

“Manufacturers will tell you it’s R&D and liability that makes implants so expensive and that they have the only one like it,” said Dr. Rory Wright, an orthopedist at the Orthopedic Hospital of Wisconsin, a top specialty clinic. “They price this way because they can.”

Zimmer Holdings declined to comment on pricing. But Sheryl Conley, a longtime Zimmer manager who is now chief executive of OrthoWorx, a local trade group in Warsaw, Ind., said high prices reflected the increasing complexity of the joint-implant business, including advanced materials, new regulatory rules and the logistics of providing a huge array of devices.

“When I started, there weren’t even left and right knee components,” she said. “It was one size fits all.”

Shopenn’s joint implant and surgery in Belgium were priced according to a different logic. Like many other countries, Belgium oversees major medical purchases, approving dozens of different types of implants from a selection of manufacturers, and determining the allowed wholesale price for each of them, for example. That price, which is published, averages about $3,000, depending on the model, and can be marked up by about $180 per implant. (The Belgian hospital paid about $4,000 for Shopenn’s high-end Zimmer implant at a time U.S. hospitals were paying an average of more than $8,000 for the same model.)

“The manufacturers do not have the right to sell an implant at a higher rate,” said Philip Boussauw, director of human resources and administration at St. Rembert’s, the hospital where Shopenn had his surgery. Nonetheless, he said, there was “a lot of competition” among U.S. joint manufacturers to work with Belgian hospitals. “I’m sure they are making money,” he added.

Cram, the Iowa health-cost expert, points out that joint manufacturers are businesses, operating within the constraints of varying laws and markets.

“Imagine you’re the CEO of Zimmer,” he said. “Why charge $1,000 for the implant in the U.S. when you can charge $14,000? How would you answer to your shareholders?” Expecting device makers “to do otherwise is like asking, ‘Couldn’t Apple just charge $50 for an iPhone?’ because that’s what it costs to make them.”

But do Americans want medical devices priced like smartphones? “That,” Cram said, “is a different question.”

A town’s lifeblood

The power and profits of the medical-device industry are on display in Warsaw, Ind., which has trademarked itself the Orthopedic Capital of the World. Four of the big-five joint manufacturers in the world are based in the United States; the other is in Britain.

Three of them — Zimmer, Biomet and DePuy, a Johnson & Johnson unit — have their headquarters in Warsaw, a town of 14,000.

An industry that began as a splint-making shop in 1895 has made Warsaw the center of a global multibillion-dollar business. The companies based here produce about 60 percent of the hip and knee devices used in the United States and one-third of the world’s orthopedic sales volume, local officials said.

Nearly half the jobs in Kosciusko County, where Warsaw is, are tied to the industry. Residents joke that a mixed marriage is when one spouse works for Zimmer and the other for DePuy.

The industry’s benefits are evident. The county has the lowest unemployment rate in Northern Indiana, and the median family income of $50,000 puts it significantly above the state average. The town has lush golf courses and streets of spacious homes. The lobby of the elegant City Hall, in a restored 1912 bank, features plaques about device makers

“We eat, sleep and breathe orthopedics,” said Conley of OrthoWorx, which she said was set up to “plan for the future of the orthopedic industry here.” The board of directors includes executives from Biomet and DePuy.

Officials at OrthoWorx say the device makers do not discuss “competitive issues” among themselves, including the prices of implants, even as employees stand together watching their children play baseball. Still, it is in everyone’s interest not to undercut the competition.

In 2011, all three manufacturers had joint implant sales exceeding $1 billion and spent about only 5 percent of revenues on research and development, compared with 20 percent in the pharmaceutical industry, said Stan Mendenhall, editor of Orthopedic Network News. They each paid their chief executives more than $8 million.

“No gift shop”

There are a number of factors that explain why Shopenn’s surgery in Belgium would cost many times more in the United States. In America, fees for hospitals, scans, physical therapy and surgeons are generally far higher. And in Belgium, even private hospitals are more Spartan.

When Shopenn arrived at the hospital, he was taken aback by the contrast with NewYork-Presbyterian Hospital, where his father had been a patient a year before. The New York facility had “comfortable waiting rooms, an elegant lobby and newsstands,” he recalled.

But in Belgium, he said: “I was immediately scared because at first I thought, this is really old. The chairs in the waiting rooms were metal, the walls were painted a pale green, there was no gift shop. But then I realized everything was new. It was just functional. There wasn’t much of a nod to comfort because they were there to provide health care.”

The pricing system in Belgium does not encourage amenities, though the country has among the lowest surgical infection rates in the world — lower than in the United States — and is known for good doctors.

While most Belgian physicians and hospitals are in business for themselves, the government sets pricing and limits profits. Hospitals get a fixed daily rate and surgeons receive a fee for each surgery, fees that are negotiated each year between national medical groups and the government.

While doctors may charge more than the rate, few do so because most patients would refuse to pay it, said Boussauw, the hospital administrator. Doctors and hospitals must provide estimates.

European orthopedists tend to make about half the income of their American counterparts, whose annual income averaged $442,450 in 2011, according to a survey by the Commonwealth Fund, a foundation that studies health policy.

Belgium pays for health care through a mandatory national-insurance plan, which requires contributions from employers and workers and pays for 80 percent of each treatment. Except for the poor, patients are generally responsible for the remaining 20 percent of charges, and many get private insurance to cover that portion.

Shopenn’s surgery, which was uneventful, was on a Tuesday. On Friday he was transferred for a week to the hospital’s rehabilitation unit, where he was taught exercises to perform once he got home.

Twelve days after his arrival, he paid the hospital’s standard price for hip replacements for foreign patients. Six weeks later he saw an orthopedist in Seattle, where he was living at the time, to remove stitches and take a postoperative X-ray.

“He said there was no need for further visits, that the hip looked great, to go out and enjoy myself,” Shopenn said.

The boomer surge

With baby boomers determined to continue skiing, biking and running into their 60s and beyond, economists predict a surge in joint-replacement surgeries, and more procedures for younger patients. The number of hip and knee replacements is expected to roughly double between 2010 and 2020, according to Exponent, a consulting firm, and perhaps quadruple by 2030. If insurers paid $36,000 for each surgery, a fairly typical price in the commercial sector, the total cost would be $144 billion, about a sixth of the nation’s military budget last year.

With the federal government unwilling to intervene directly, some doctors and insurance plans are trying to reduce the costs themselves by mandating preset prices or forcing more competition and transparency.

The Affordable Care Act tries to recoup some of the medical-device manufacturers’ profits by imposing a 2.3 percent tax on their revenues, effective this year. But Brad Bishop, executive director of OrthoWorx and a former Zimmer executive, said the approach would harm an innovative U.S. industry, and the cost would ultimately be borne by joint-replacement patients “whose average age is 67.” He argued that the best way to reduce the cost of joint-replacement surgery was to rescind the tax and decrease government interference.

The medical-device industry spent nearly $30 million last year on lobbying, according to the Center for Responsive Politics. The Senate moved to repeal the tax, and the House is expected to take it up this fall. The bill’s supporters included both senators from Indiana.

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