"Secret" Supply Costs Undermine Price Transparency

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November 15, 2006

In the wake of a court ruling upholding Guidant Corporation's right to classify cardiac implant prices as trade secrets, rural hospital CFO Todd Nelson began working with his U.S. Senate and House representatives in Iowa to open access to supply costs. Nelson is vice president of Grinnell Regional Medical Center in Grinnell, Iowa. In the July 2006, edition of HFMA's new newsletter Consumer-Directed Health Care, Nelson, who believes supply cost data are essential for healthcare price competition, talks about the importance of knowing supply prices and its impact on price transparency.

Why is knowing supply prices so important?

Nelson: Because supplies make up a large portion of the cost of many procedures. If an insurer pays $9,000 for a hip replacement, you may think a hospital is profiting, but probably not. If 70 percent of that payment goes for the implant, hospitals could actually be losing money.

Why not just raise the price for the procedure?

Nelson: It's difficult. Medicare, Medicaid, and the largest insurer in our state set their prices and don't negotiate. Since we have to accept lower payments from them, and they make up about 75 percent of our business, it's hard to justify higher prices to other customers.

Why not just show that Medicare is paying less than cost?

Nelson: That's where supply cost secrecy becomes a problem. If our contract with a supplier prohibits us from disclosing the price we paid, we can't show our payers or patients what our costs are. If everyone thinks that a price that is 30 percent below our costs is fair, and they won't pay more, we're not going to stay in business long.

Why not negotiate a lower cost for implants?

Nelson: Secrecy has us there, too. We can't find out from consultants or market research firms what the going rate for a device is because they can't get pricing information from other hospitals. In fact, that was the issue in the lawsuit Guidant won. Guidant sued a market information consulting firm, accusing the company of inducing hospitals to violate their contracts with Guidant that included confidentiality language.

Why not go with a group purchasing organization to get bids from competing companies?

Nelson: We do use a GPO, which does a great job. But not every physician wants to use the products we contract for, and even those who do sometimes need a different product for clinical reasons. When you're a small rural facility you may only have one physician in a specialty, so being flexible to the physicians' needs is important. As far as getting bids goes, it's not out of the ordinary to put out a request for proposal to two vendors and get a price back from them that is within $10 on a $10,000 item.

What can providers do to help?

Nelson: Talk to your Congressional delegation. Emphasize that we're in the business of caring, and it's our mission to care for our patients. We're not out to make huge profits, but we do have to cover our costs. If we are going to have a competitive market for health care with the lower costs and improved service that will bring, we cannot allow suppliers to keep their costs secret. A step in the right direction would be to include standard confidentiality language in supplier contracts that protects our rights to have control of our own purchasing information.

SOURCE: 'Secret' Supply Costs Undermine Price Transparency, Consumer-Directed Health Care, July 2006

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