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Costing An Arm and a Leg

Written by
21 October 2020

This article from the Spring 2020 edition of the IPA Review is written by Private Health Australia’s Policy and Research Director, Ben Harris.

If you want to know why private health insurance is expensive in Australia, here are some of the culprits. Private health insurance is highly over-regulated. There are hundreds of pages of laws, rules and regulations dictating what health funds can pay for, what they can’t pay for, what they must pay for, and how much they have to pay. With all the best will in the world, such over-regulation leads to problems.

The highest growing area of expenditure for health funds —and consequently the most important driver of premium increases—are prostheses. The cost of these medical devices is growing by about 8 per cent annually, while the cost of surgery is growing at less than 1 per cent a year.

Health funds have to pay for items on a government-mandated Prostheses List regardless of quality, efficacy, cost-effectiveness or even safety. More than 11,000 items are on the list, and each item has a listed price that funds must pay. Health economist Stephen Duckett, who is Grattan Institute Health Program Director and Emeritus Professor of Health Policy at La Trobe University, has described this process as “a protection racket”. There are no free market forces, and Australians pay thousands of dollars more for common items than in the United Kingdom, France, New Zealand and even the United States.

The overregulation has a very strict and defined process for items being placed on the Prostheses List. Prices are not set by the market, by tender or through looking at the cost, but by finding something similar on the list and pricing the new item the same as the existing item. If there is a new product or competitor in the market, or an innovation makes it cheaper to provide a service, prices stay the same.

If there are mistakes in the paperwork, or something is misnamed, it is likely to get through the system without too much scrutiny as the system is not designed to check everything and the sponsors’ descriptions are accepted on face value. If something inappropriate or incorrect does slip through, it is almost impossible to fix. There is no legal process for items to come off the Prostheses List, and even if there was, the government has signed a deal with the industry body that nothing should come off the list until 2022. This would be laughable if not for the fact that more than 13 million Australians sit around kitchen tables each month to pay the bills, and many families are struggling to afford private health insurance premiums.

Medical devices are the fastest-growing cost in private health care.

So how does this happen? The short answer is that we in the private health insurance industry were not paying enough attention. The current system was put in place in the last century, and prostheses were a very minor part of the cost structure. Over time, insurers did not recognise the consequences of small, incremental changes to the system proposed by the device industry, and administrative efficiencies designed to automate payments came at the cost of greater scrutiny.

More recently, health funds have realised medical devices are now the fastest-growing cost in private health care, and we are paying much more attention. And we do not like what we see.

Three key flaws in the Prostheses List are complexity, absence of a market mechanism, and the lack of transparency.

COMPLEXITY

There are more than 11,000 individual components listed on the Prostheses List. Every possible component is listed separately. To implant a plate to fix a fracture for example, not only is the plate on the Prostheses List, but also each screw. The health insurers have a pretty simple definition of a prostheses—something that goes into the body and stays there. If you can see it on an X-ray, then it is a prosthesis. The government definition, however, is much wider:

A prosthesis should be surgically implanted in the patient and be purposely designed in order to replace an anatomical body part; or combat a pathological process; or modulate a physiological process; or be essential to and specifically designed as an integral single-use aid for implanting a product… which is only suitable for use with the patient in whom that product is implanted; or be critical to the continuing function of the surgically implanted product …. and which is only suitable for use by the patient in whom that product is implanted.

The number of devices per operation has been increasing dramatically, as manufacturers take advantage of new rules to list more and more items. For example, bleeding is a “pathological process”. The Prostheses List now contains many sponges, such as Nasopore—a packing material used to stem bleeding in the nasal cavity, and a common sight on football fields. While a package of eight can be bought online for US$99 (about A$136), the reference pricing model in Australia results in Nasopore being billed to health funds at $132 each.

The use of Nasopore—a packing material used to stem bleeding in the nasal cavity—is a common sight on football fields, but thanks to inclusion on the Prostheses List now costs Australian private health funds almost eight times the online purchase price.

There are now dozens of items such as staples, sponges and skin glues on the Prostheses List; items that would be more sensibly funded in the overall price of an operation. In many cases, items that have been in use for many years are now added to the Prostheses List, distorting the market and increasing the cost for consumers.

For example, a skin glue called Dermabond was first marketed for use in Australia around 1999, but the manufacturer did not attempt to put it on the Prostheses List until nearly 20 years later. As it stays in the patient until it dissolves it is not really a prosthesis. However, with the rules changed, they got it listed and now it costs health fund members more than $10 million a year. It’s a good product, but nowhere near as cost-effective as stitches. But since Dermabond is on the Prostheses List at a set price, the volume has skyrocketed.

There is also a clear incentive for manufacturers to maximise revenue by unbundling packages. For example, in July’s updated list, a ‘new item’ was added: a $152 torque wrench to put in a neurostimulator device. This item was deemed essential and specifically designed as an integral single-use aid for implanting a product. Putting aside the outrageous cost or the fact that most likely many torque wrenches could do the job, simply repackaging the wrench as a separate item has added $152 to the operation cost with no public benefit.

Why costs add up

Why costs add up.
Images: © Smith & Nephew

NO MARKET MECHANISM

Australia’s Prostheses List relies on none of the market mechanisms available to maximise welfare. Prices are set by the Department of Health based on a reference price to something else on the list, chosen by the manufacturer. What could go wrong?

A recent report commissioned from Evaluate by Private Healthcare Australia compared the prices of the most expensive 287 items on the Prostheses List with prices listed for the same products in the United Kingdom, France and New Zealand. While direct matches were not available in all cases, the report estimated the Prostheses List overpriced items in Australia by an average of more than 30 per cent.

In some cases, the price differential is extreme. Drug-eluting stents, for example, are priced at $2,298 on the Prostheses List regardless of the brand and type. In Britain’s National Health Service (NHS) the four major brands are priced from GBP330-705 (A$623-1333). In France, two are priced at EUR760 (A$1,239) and two at EUR840 (A$1,369). In New Zealand, the four brands are priced between NZ$750-1,600 (A$705-1,504). Two types of artificial hips, the Polarstem and Accolade II, are priced at $4,196 in Australia, but only EUR808 (A$1,293) in France. Back in February, you could fly to Paris, pick up an artificial hip, stay a night at Georges V, and fly back for less than the product’s cost to health funds in Australia.

The industry body has been given a veto on cutting costs.

If a new product is approved for the Prostheses List in Australia, the price is set by referring to another similar item on the list. For direct comparison, there is no price competition between brands, no opportunity to offer a lower price to attract market share, and no advantage to members of health funds if technological improvements reduce the manufacturing cost. This scenario favours incumbents, and stifles innovation.

In the absence of direct price competition, some manufacturers reportedly offer rebates to hospitals for using their products. Private insurers are charged the full cost of a prosthesis in accordance with the Prostheses List, then the manufacturer pays a rebate to the hospital that purchases that prosthesis and/or medical practitioner that chooses that prosthesis to be implanted on their patient. Ian Burgess, from the Medical Technology Association of Australia (MTAA), has described this practice as “standard commercial arrangements that apply across all markets in our economy”. The payors (health funds and Australian families paying premiums) do not get these alleged rebates: they go to the hospital and/or medical practitioner, a third party. Rebates are not disclosed to patients or health insurers as the payors of the prostheses. In effect, the gap between the actual cost price and the price on the Prostheses List is captured by the manufacturer with, in some cases, a kickback to the hospital.

LACK OF TRANSPARENCY

A deal the Australian Government signed with the MTAA was intended to reduce the costs of prostheses for families paying private health insurance premiums, but insurers were not a party to the agreement and this deal has been an abject failure. The MTAA claimed the agreement would save $1.1 billion over four years. In the first year, savings were $13 million. More importantly, this agreement states that prices would not be reduced without the agreement of the MTAA. The government has given the industry body an effective veto on cutting costs. The agreement also includes a raft of ‘administrative measures’ which further throw a veil over costs.

For example, the Prostheses List does not list catalogue numbers within the billing codes, which means health funds are not aware of exactly which items they are being mandated to fund. For example, companies have been caught changing the descriptions of items, later for it to emerge that the new devices are actually consumable items such as sutures which are ineligible for the list.

If an item is placed on the Prostheses List, it must be funded regardless of how it is used. This raises serious safety concerns. For example, a bone graft product which was only approved by the Therapeutic Goods Administration for a specific purpose in spinal surgery obtained listing on the Prostheses List in 2017. In 2019, more than 95 per cent of the use of the product in Australia was for so-called ‘off-label’ use. This product, now withdrawn from sale in Australia, has been the subject of hundreds of legal cases in the United States. The cost to health funds was more than $18 million.

The federal authority has no skin in the game.

The rules mean that any product on the Prostheses List can be used in any procedure, regardless of cost. A blood sealant that was designed for brain and heart procedures is now being regularly used in knee operations—costing more than $1100 per tube—in place of a $30 suture.

Unfortunately, there is no compliance or corrective mechanism in the Prostheses List. Health fund members pay for the devices, but the Prostheses List is administered by a poorly resourced federal authority that has no skin in the game. Where we do find evidence of mistakes, misdeeds or inappropriate expenditure, it takes months for corrective action.

For example, the $1023 ‘pin-clamp assembly’ was alerted to the Department of Health in January, and as at early August it is still listed. We raised the off-label use of the bone graft product in September 2019, and it took until March 2020 for it to be delisted.

The penalty for a manufacturer for making a mistake on the Prostheses List is making hundreds of thousands of dollars of excess profits.

FIXING A BROKEN SYSTEM

It is time to junk the Prostheses List and allow the market to improve price and performance and ensure more transparency to improve safety and efficacy. The Grattan Institute has described the Prostheses List as “redolent of Soviet-era central planning at its worst”. In a recent presentation Stephen Duckett noted:

The current prosthesis pricing approach incorporates all the wrong incentives, creates arbitrage opportunities, encourages rent seeking, and leads to poor outcomes for patients, health insurance members and taxpayers. It does nothing to improve efficiency. It is, in short, a protection racket.

The former chair of the Australian Competition and Consumer Commission (ACCC), Graeme Samuel AC, stated in The Australian (6 November 2016)

“The margins are not just moderate — in many cases they are beyond belief, and can only lead an observer to the conclusion that somewhere in the supply chain, whether it be prostheses suppliers, hospitals, or others involved in the purchasing system, the consumer is being exploited.”

Other significant areas of government health expenditure like the Pharmaceutical Benefits Scheme (PBS) include price disclosure, health technology assessments, group premiums, reference pricing, brand premiums and linking reimbursement to use only for clinically approved indications. If there is a new product, the price is driven down rather than up. Spending is only allowed where there is a clear benefit to the patient.

The Prostheses List process generally lacks this spending discipline. The waste is significant and harmful. Estimates vary widely, but savings from greater spending discipline are likely to save $400-500 million per annum without affecting patient care. The Commonwealth would reap approximately a quarter of those savings through the rebate, with the rest distributed among Australian families paying premiums.

Many in the sector favour complete deregulation.

The public sector uses competitive tendering arrangements to set an efficient price. It seems ridiculous for the private sector to be looking to the public hospital system to work out how to improve competition, but that’s how broken our current system is.

Private Healthcare Australia has previously recommended that the Commonwealth establish a national independent body to manage the procurement of prostheses (including the implementation of international reference pricing). While still favouring a body such as the Independent Hospitals Pricing Authority taking this role and developing an efficient price for prostheses used in public and private hospitals (while allowing for different products to be used), the rorts within the system currently are seeing many in the sector favouring complete deregulation.

Product images included in this article are from manufacturers’ catalogues and websites.

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