That Device Contract May Be Bleeding You--And Your Doctors--Dry

Philip Betbeze, Senior Editor-Finance , October 22, 2007

How does a senior leader make the case to his doctors that medical device companies are taking bread out of their mouths--and their pockets? Show them a graph, for one thing.

We just wrapped up our 2007 Top Leadership Teams event last week in Chicago, and it was the best yet, if I can toot our own horn for a moment. More than 125 senior-level executives gathered this year to hear five panel Q&A presentations from around 38 CEOs, CFOs and COOs -- the top leadership teams in the country hearing from their counterparts about problem solving, new strategies, and how to get the best of seemingly intractable challenges.

Our first-day lunch speaker was Michael Sachs, chairman of Sg2, a healthcare consulting and education company that works with hospital senior leaders to help them build clinical excellence, streamline operations, grow market share and exceed financial goals.

One graphic Sachs showed during his presentation was the downward sloping line of physician reimbursement over the past few years accompanied by the dramatic upward slope of reimbursements directed to medical device manufacturers. Other areas were included, such as healthcare facility reimbursement and drug company reimbursement, but the most dramatic difference was between docs and the medical devices they implant into their patients.

And the only line that was sloping downward over time, reflecting a real decline in income, was the one for physician reimbursements. Over the past 10 years or so, medical device costs are up in the neighborhood of 50 percent while physician reimbursements have shrunk nearly 10 percent; these numbers reflect the bottom line after all lobbying, court decisions and legislation are finished.

Seeing that graphic tell the macroeconomic story of how a largely static reimbursement pie is divided made me lean over to the hospital CEO sitting on my right and ask him how difficult it was to make the case to physicians that their choices to use the most expensive medical devices harm not only hospital margins, but their own personal margins as well.

"We try to tell them, 'you lean on device reps because they make you feel good, they're there to hold your hand when you have questions about the device," my lunchmate--an MD himself--said. "But there's a reason they're so nice to you and there's a reason why they're driving Porsches. You're a respected surgeon with one or more advanced degrees who chooses what goes into your patients. They're 26. Think about it.

'"The CEO's vignette represents an extreme example to be sure. Sometimes reps from medical device manufacturers do provide a valuable service to docs. But device prices are already held outrageously high because hospitals aren't allowed to disclose their contract terms, even for aggregation purposes to a third party. Thus opacity drives higher and higher prices, as device manufacturers compete with each other not on price and quality, but on how good they are at convincing doctors that their product is better than the other guy's, causing those high-powered docs to insist that the hospital where they have privileges carries that device.

In what other industry does this kind of activity occur? Defense, maybe--and you see how much that costs. But pressure is mounting in this country to get better value and lower costs for healthcare. When hospitals can't share information to get better deals on devices in a country that's doing everything it can to curb healthcare costs, guess who's getting cut, and guess who's giving them the knife--er, scalpel?

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at

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