Is Greater Price Transparency Needed in the Medical Device Industry?

1. Is Greater Price Transparency Needed in the Medical Device Industry? Hal J. Singer Empiris, L.L.c.

2. Overview • Assess previous attempts to mandate disclosure rules • Health care industry • Other industries • Identify economic conditions where mandatory disclosure generates net social benefits • Apply lessons to the medical device industry

3. Case Studies • Cement: In 1993, Danish antitrust authority published stats on transactions prices of individual firms for two types of ready-made cement in three regions of Denmark • Rail rates: In 1986, Congress required disclosure of all essential grain contract terms to the ICC • Long-distance rates: In the mid-1980s, FCC required AT&T to post its tariffs.

4. Conditions Under Which Mandatory Disclosure Generates Large Benefits • General conditions • search costs are large and are reduced substantially; and • disclosure provides current price information. • Industry-specific conditions are • competitive forces would cause intermediaries to pass cost savings on to end users; and • there is a large variation in the price paid by purchasers not related to volume, loyalty, or bundled discounts

5. Conditions Under Which Mandatory Disclosure Generates Large Costs • production is concentrated among only a small number of firms; • there are few other products that can be easily substituted for the product in question; • there is significant repeated interaction between firms in the industry; • there is significant product standardization across firms in the industry; • firms do not already know their rivals’ prices.

6. Application of Framework to Implantable Devices (Benefits) • Are Search Costs Large? • No: GPOs reduce search costs for negotiated medical product sales. • Would Disclosure Provide Current Price Information? • No: Prices disclosed would represent prices for the past quarter rather than current prices. • Average price data also incorporate discounts (volume, bundled, loyalty), which frustrate straightforward comparisons

7. Application of Framework to Implantable Devices (Benefits) • Would Competitive Forces Cause Hospitals to Pass Cost Savings on to Their Patients? • No: Hospital purchasing decisions are influenced by individual surgeons. • Hospitals with local market power are not likely to pass on savings. • Do Prices for Medical Devices Vary Across Hospitals for Reasons Unrelated to Volume Discounts? • Unsure: GAO notes that price differences varied by the size of the hospital involved

8. Application of Framework to Implantable Devices (Costs) • Is the Supply of Medical Devices Concentrated? • Yes: 2 makers of drug-eluting heart stents, 3 makers of ICDs • Are Other Products Substitutable? • No: Hospitals prefer to standardize • In cases where substitution is possible (e.g., bare metal stent v. drug-eluting stent ), supply is characterized by same firms

9. Application of Framework to Implantable Devices (Costs) • Do Industry Participants Repeatedly Interact? • Yes: GPO contracts tend to be re-bid every three to five years • Are Products Homogenous? • Mixed: E.g., implantable orthopedics are differentiated by type, shape, and adjustability • Do Industry Participants Already Know Their Rival’s Prices? • No: GPO transaction prices are not publicized and tend to vary by contract

10. Conclusion • Conditions under which the benefits of mandatory price disclosure are likely to be large are not met. • Conditions under which the costs of mandatory price disclosure are likely to be large are met. • Analysis indicates that the proposed rule would not reduce prices for hospitals or patients.