Medical device prices in crosshairs of reform

Michael Mussallem, chairman and chief executive officer of Edwards Lifesciences Corporation, speaks at the Reuters Health Summit in New York, November 11, 2009.

NEW YORK (Reuters) - Cash-strapped hospitals are stepping up pressure on the prices of medical devices -- from knee replacements to diagnostic tests and surgical systems -- as momentum builds toward U.S. healthcare reform.

Medical devices represent one of the biggest expenses for hospitals, which are struggling to care for rising numbers of uninsured patients as the weak economy forces more and more Americans out of work.

Congress is taking aim at the medical technology industry with a proposed tax on device makers that would generate as much as $40 billion over 10 years to help pay for healthcare reform.

At the same time, the hospital industry has accepted a deal with some U.S. senators to absorb $155 billion in Medicare payment cuts over a decade.

The chairman of the Advanced Medical Technology Association expects the Medicare reductions to hurt the medical device industry, which his group represents.

"Frankly, I think (hospitals) are going to turn to their suppliers, people like us, to help them with this," Michael Mussallem said at the Reuters Health Summit in New York.

Mussallem, who is also chief executive officer of heart valve maker Edwards Lifesciences (EW.N), said that as hospitals face increasing pressure to cut costs, one way is to push prices lower.

"I would expect, if anything, for that to be more intense in the future," Mussallem said.

FINANCIAL TIES, 'KNOTTY' PROBLEMS

For Tenet Healthcare Corp (THC.N), reining in the high cost of medical devices is one of its biggest challenges, said Trevor Fetter, CEO of the No. 3 U.S. hospital chain.

"Margins on devices are extremely high," especially on cardiac and orthopedic devices, Fetter said. But while hospitals bear the cost of those products, he said, their ability to negotiate better pricing is limited because doctors influence the selection of the devices.

"That is a really knotty problem," he said, due to the often murky financial relationships between many physician specialists and device makers, another issue the U.S. Congress has been trying to address.

Doctors sometimes receive consulting fees or royalties from manufacturers for collaborating in the development of medical technology and thus often have strong preferences for certain products.

Proposals to require physicians to disclose their financial ties with medical device makers have been percolating in the U.S. Congress long before the Obama Administration committed to reforming the healthcare system.

"If we all knew what the payments and sale practices were," Fetter said, "that would probably bring the cost down pretty quickly."

To make matters worse, he said, the government pays hospitals a fixed price when a physician performs a medical procedure, regardless of the cost of the devices or instruments used.

Big device makers such as Boston Scientific Corp (BSX.N) and Johnson & Johnson (JNJ.N) in recent weeks have said they've seen pricing pressure intensify as key markets weakened in the global economic downturn.

Beckman Coulter (BEC.N) Chief Executive Officer Scott Garrett told the Reuters Health Summit that he saw no let-up in this trend, even in the absence of healthcare reform.

"Pricing in my career has only gone one way, and that's down," he said. "We're always expecting pricing pressure."

(Reporting by Debra Sherman and Susan Kelly; Editing by Lisa Von Ahn)