Medical Device Spending

Like drug manufacturers, device makers have been criticized for the cost of their products and the role of those costs in increasing health spending.  The industry has responded by releasing an actuarial study examining medical device spending.   (AdvaMed Paper)     Using Census Bureau data, the researchers say that in 2011, $159.4 billion was spent on medical devices and in vitro diagnostics, or 5.9% of national health spending.  During a 23 year period from 1989 to 2011, device costs rose from 5.3% of spending to that 5.9% level, but since 1992 the share of spending accounted for by devices has basically been flat.  Since 1992, device spending has increased at an average rate of 6.1% annually, almost exactly in line with the growth in overall health spending.  At the same time, the unit prices for medical devices grew more slowly than medical or general CPI, meaning all the growth in spending must have been accounted for by utilization gains.  While the authors suggest that this may reflect the competitive nature of the industry, it may also be due to the fact that the bulk of medical device reimbursement comes from government programs which set prices by fiat and tend to raise them very slowly.  It likely also is caused by the industry setting high initial prices and seeing margins stay stable or even growth as cost of goods and other expenses come down with volume growth. The issue with device spending, as with drugs, may not be how often they are used or how appropriately, but whether the margins are justified.  Based on public company financials, gross margins are often in the 70% to 80% range, meaning the products only cost about 20% to 30% of the price received.  The remainder goes to selling, marketing and administrative expenses and profit margins.  The size of these expenses and margins is where the focus should be and lower prices would obviously result in less spending.   It should be noted that the data used is not derived from actual payer information on reimbursements, which would be the most accurate way to measure real-world spending and spending growth. The researchers failure to use this data, which is hard to extract, also calls into question their conclusion on price growth.   The most that can be said for the device category of health spending is that it hasn’t been an outsized contributor to the cost problem, but it hasn’t been a non-factor.