MEDICARE

Lack of Price 

Transparency May 

Hamper Hospitals’ 

Ability to Be Prudent 

Purchasers of 

Implantable Medical 

Devices 

Report to the Chairman, Committee on 

Finance, U.S. Senate

January 2012

GAO-12-126

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-126, a report to the 

Chairman, Committee on Finance, U.S. 

Senate

January 2012

MEDICARE

Lack of Price Transparency May Hamper Hospitals’ 

Ability to Be Prudent Purchasers of Implantable 

Medical Devices

Why GAO Did This Study

Implantable medical devices (IMD)—

including a variety of cardiac and 

orthopedic devices provided to 

Medicare beneficiaries in inpatient or 

outpatient hospital settings—represent 

a significant share of hospitals’ supply 

costs. Hospitals purchase IMDs 

directly from manufacturers or through 

group purchasing organizations (GPO) 

and their purchasing agreements often 

contain confidentiality clauses 

restricting them from revealing to third 

parties the prices they pay for such 

devices. Policymakers are concerned 

that the lack of price transparency 

inhibits competition in the device 

market, leading to higher costs for 

hospitals, and ultimately higher 

Medicare spending. GAO was asked to 

examine (1) Medicare spending and 

utilization trends for procedures 

involving IMDs provided to 

beneficiaries, and (2) what available 

information shows about the prices 

hospitals pay for IMDs and any factors 

particular to the IMD market that 

influence those prices. GAO analyzed 

the most recently available Medicare 

inpatient and outpatient hospital claims 

from fiscal years 2004 through 2009. 

GAO requested price information on 

five devices from 60 hospitals, 6 

GPOs, Department of Defense (DOD) 

medical centers, and the Department 

of Veterans Affairs (VA) health system. 

GAO interviewed officials from GPOs, 

device manufacturers, large hospital 

systems, and small hospitals about the 

factors that affect the prices hospitals 

pay for IMDs.

What GAO Found

From 2004 through 2009, expenditures for hospital IMD procedures increased 

from $16.1 billion to $19.8 billion, an increase of 4.3 percent per year—a rate 

equal to that of Medicare spending for other hospital procedures. While cardiac 

and orthopedic procedures accounted for nearly all IMD-related expenditures, 

orthopedic procedures accounted for most of the increase in such expenditures 

during this period. Utilization increased at a faster rate for orthopedic devices and 

accounted for the majority of changes in expenditures for IMD procedures during 

the period.

The information GAO obtained on the amounts hospitals paid for selected IMDs 

showed substantial variation. For a number of reasons, the detailed information 

needed to accurately compare prices across hospitals—both the specific model 

and sale price net of discounts and rebates—was not reported by all respondents 

for all IMDs in our study. However, data from 31 hospitals indicated substantial 

variation in reported prices for cardiac devices. For example, the difference 

between the lowest and highest price hospitals reported paying for a particular 

automated implantable cardioverter defibrillator (AICD) model was $6,844. The 

difference between the highest and lowest price reported for another AICD model 

was $8,723. The price differences for the remaining two AICD models in our 

study fell in between $6,844 and $8,723. The median prices across the four 

AICD models ranged from $16,445 to $19,007. A factor particular to the IMD 

market that affects prices hospitals pay is the influence of physicians on 

hospitals’ IMD purchasing. Although physicians are not involved in price 

negotiations, they often express strong preferences for certain manufacturers 

and models of IMDs. To the extent that physicians in the same hospital have 

different preferences for IMDs, it may be difficult for the hospital to obtain volume 

discounts from particular manufacturers. Also, confidentiality clauses barring 

hospitals from sharing price information make it difficult to inform physicians 

about device costs and thereby influence their preferences. Other factors that 

influence IMD prices include the degree of seller competition and a hospital’s 

market share. 

These data suggest that some hospitals have substantially less bargaining power 

with the small group of companies that manufacture particular IMDs and 

consequently face challenges in obtaining more favorable prices. The lack of 

price transparency and the substantial variation in amounts hospitals pay for 

some IMDs raise questions about whether hospitals are achieving the best prices 

possible. Any excess or unnecessary costs that hospitals incur through IMD 

pricing may be passed onto the Medicare program. 

The Department of Health and Human Services, VA, and DOD reviewed a draft 

of this report and had no general comments.

View GAO-12-126. For more information, 

contact James C. Cosgrove at (202) 512-7114 

or cosgrovej@gao.gov.
Page i GAO-12-126 Implantable Medical Devices

Letter 1 

Background 5

Medicare’s Payment Systems Indirectly Account for Prices 

Hospitals Pay for IMDs; Efforts Are Under Way to Better 

Account for These Prices 9

Medicare Expenditures for IMD Procedures Increased from About 

$16 Billion to $20 Billion from 2004 through 2009—Driven 

Largely by Increased Utilization of Orthopedic Devices 12

Information Available on the Prices Hospitals Paid for Selected 

IMDs Shows Substantial Variation; Hospital-Physician 

Relationships Are a Particular Influence on Prices Paid 22

Concluding Observations 29

Agency and Industry Comments 30

Appendix I GAO Contact and Staff Acknowledgments 32

Tables

Table 1: Type of Detailed Information Reported on Cardiac and 

Orthopedic IMDs, Fiscal Year 2010 23

Table 2: Median Prices and Differences between the Lowest and 

Highest Prices Hospitals Paid for Cardiac Devices, Fiscal 

Year 2010 26

Figures

Figure 1: Components of a Total Hip Replacement 6

Figure 2: IMD Expenditures per Medicare FFS Beneficiary, 2004 

through 2009 13

Figure 3: Orthopedic IMD Expenditures per Medicare FFS 

Beneficiary, 2004 through 2009 15

Figure 4: Cardiac IMD Expenditures per Medicare FFS Beneficiary, 

2004 through 2009 17

Figure 5: Orthopedic IMD Utilization per 10,000 Medicare FFS 

Beneficiaries, 2004 through 2009 19

Figure 6: Cardiac IMD Utilization per 10,000 Medicare FFS 

Beneficiaries, 2004 through 2009 20

Figure 7: Contribution toward Per-Beneficiary Expenditure Growth 

between 2004 and 2009, by Orthopedic IMD Procedures 21

Contents
Page ii GAO-12-126 Implantable Medical Devices

Abbreviations

AICD automated implantable cardioverter defibrillator

AHA American Hospital Association

APC ambulatory payment classification 

CMS Centers for Medicare & Medicaid Services

CRT-D cardiac resynchronization therapy defibrillator

DOD Department of Defense

FFS fee-for-service 

GPO group purchasing organization

IMD implantable medical device

MS-DRG Medicare-severity diagnosis related group

PPS prospective payment system

VA Department of Veterans Affairs

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

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necessary if you wish to reproduce this material separately.
Page 1 GAO-12-126 Implantable Medical Devices

United States Government Accountability Office

Washington, DC 20548

January 13, 2012 

The Honorable Max Baucus

Chairman

Committee on Finance

United States Senate

Dear Mr. Chairman:

Implantable medical devices (IMD)—a broad range of items that include 

coronary stents, cardiac defibrillators, and hip and knee joint 

replacements—can prolong life and improve the quality of life for patients 

that receive them.1

For hospitals, IMDs represent a significant share of their supply costs; 

further, for some procedures, the cost of IMDs can be the most expensive 

part of an inpatient hospital stay or outpatient procedure. As with other 

medical supplies, hospitals buy IMDs at prices negotiated directly with 

manufacturers or at prices negotiated by buying intermediaries, known as 

group purchasing organizations (GPO). By pooling the purchasing power 

of multiple providers, GPOs may be strongly positioned to bargain for 

lower prices from manufacturers.

As the Medicare population grows and beneficiaries 

expect to live longer, the demand for IMDs is likely to increase steadily. 

Therefore, the Centers for Medicare & Medicaid Services (CMS)—the 

agency that administers the Medicare program—will continue to be a 

major payer for procedures involving IMDs provided in both inpatient and 

outpatient hospital settings.

2

 

1

For this report, we define implantable medical devices as artificial devices implanted 

entirely within the body that are intended to remain in the body permanently. However, 

some of these devices have a limit to their effective life span and will require replacement.

However, hospitals face challenges in 

obtaining information on IMD prices in the market because comparable 

price information across manufacturers generally is not publicly

2

See GAO, Group Purchasing Organizations: Services Provided to Customers and 

Initiatives Regarding Their Business Practices, GAO-10-738 (Washington, D.C.: Aug. 24, 

2010).

 
 

Page 2 GAO-12-126 Implantable Medical Devices

available.3,4 Device manufacturers often require hospitals to sign 

purchasing agreements that contain confidentiality clauses restricting 

them from revealing to third parties the prices they paid for medical 

devices. To the extent that information on IMD prices in the market is not 

disclosed, the ability of hospitals to bring comparative price information to 

bear in IMD purchasing negotiations and decisions may be limited.

Without such competitive pressure, the prices hospitals pay for IMDs may 

be higher than they otherwise would be.5

In an environment of increasing health care costs, the efficiency of the 

IMD market has implications for Medicare cost containment. 

Policymakers are concerned that the lack of price transparency inhibits 

competition in the device market, leading to higher costs for hospitals, 

and ultimately higher spending in Medicare.6

To describe how Medicare’s payment systems account for the prices 

hospitals pay for IMDs, we reviewed annual regulations for the inpatient 

prospective payment system and outpatient prospective payment system. 

You asked us to examine 

various issues regarding Medicare spending and the prices of implantable 

medical devices. In this report, we examined: (1) how Medicare’s hospital 

payment systems account for the prices hospitals pay for IMDs, (2) the 

spending and utilization trends for procedures involving IMDs provided to 

Medicare beneficiaries, and (3) what available information shows about 

the prices hospitals pay for IMDs and any factors particular to the IMD 

market that influence those prices.

 

3

Certain information on IMD prices may be publicly available through sources such as the 

Department of Veterans Affairs (VA) National Acquisition Center website. However, the 

database is not complete and represents price ceilings established under VA’s national 

contracts with IMD manufacturers. 

4

GAO has reported on challenges consumers face in obtaining cost information for the 

health care services they obtain. See GAO, Health Care Price Transparency: Meaningful 

Price Information Is Difficult for Consumers to Obtain Prior to Receiving Care, 

GAO-11-791 (Washington, D.C.: Sept. 23, 2011).

5

See D. Andrew Austin and Jane G. Gravelle, Does Price Transparency Improve Market 

Efficiency: Implications of Empirical Evidence in Other Markets for the Health Sector, 

RL34101 (Washington, D.C.: Congressional Research Service, Apr. 29, 2008.)

6

During the 110th Congress, Senators Grassley and Specter sponsored legislation that 

would require device manufacturers to submit the average and median sales prices of 

covered devices to the Secretary of Health and Human Services on a quarterly basis. 

S. 2221, 110th Cong. § 2 (as introduced and referred to the S. Comm. on Finance, Oct. 23, 

2007). This legislation did not become law.
 

Page 3 GAO-12-126 Implantable Medical Devices

We also interviewed officials from CMS and the Medicare Payment 

Advisory Commission.

To identify the Medicare spending and utilization trends for IMD 

procedures provided to Medicare FFS beneficiaries, we analyzed the 

most recently available Medicare inpatient and outpatient hospital claims 

for a 6-year period, from fiscal years 2004 through 2009.7 Using 

procedure and payment codes obtained from CMS and industry sources, 

we identified 364 inpatient and 85 outpatient procedure codes that were 

generally associated with an IMD.8 We matched these procedure codes 

with 115 inpatient and 30 outpatient “device dependent” payment codes 

in each claim. Because our list of IMD-dependent codes represented 

procedures performed almost exclusively in a hospital setting, we 

excluded procedures performed in other facilities (e.g., ambulatory 

surgical centers). We only included services and expenditures when the 

IMD-dependent procedure code was the primary procedure associated 

with the payment for the claim submitted to Medicare.9,10 We examined 

the extent to which changes in expenditures were explained by changes 

in utilization or average cost.11

 

7

These data only include payments to hospitals for procedures performed in the 50 states 

and the District of Columbia. Unless noted otherwise, we report all years on a fiscal year 

(Oct. 1 through Sept. 30) basis.

We determined that the claims data we 

used were sufficiently reliable for the purposes of our analysis by 

performing appropriate electronic data checks.

8

Because codes used by hospitals to submit claims to Medicare are broadly defined to 

cover a set of related services and may or may not include the implantation of a medical 

device, we relied on several sources to develop a list of procedure codes for services that 

generally involve an IMD—what we refer to as “device-dependent.” To ensure that these 

codes met our definition of an IMD, we developed a content analysis using key word 

criteria to identify exclusions—procedures involving devices that did not meet our 

definition of an IMD—and inclusions—procedures generally involving devices that did 

meet our definition. We completed our compilation of inpatient procedure and payment 

codes by reviewing CMS payment system final rules.

9

We use the term “case” to indicate claims where an IMD procedure largely determined 

the Medicare payment.

10All expenditures are reported in nominal terms and are not adjusted for inflation.

11Because inpatient and outpatient services are paid for differently, we examine these 

separately.
 

Page 4 GAO-12-126 Implantable Medical Devices

To determine what information is available on the prices hospitals pay for 

IMDs, we selected five specific devices used in the five IMD-related 

procedures that ranked highest in terms of Medicare spending in 2009.

The five devices were primary total knee implants, primary total hip 

implants, coronary drug-eluting stents, automated implantable 

cardioverter defibrillators (AICD), and cardiac resynchronization therapy 

defibrillators (CRT-D).12 We asked 60 randomly selected hospitals,13 

6 GPOs,14 Department of Defense (DOD) medical centers and hospitals, 

and the Department of Veterans Affairs (VA)15 to report fiscal year 2010 

pricing information for each of these five IMDs. Of the 60 hospitals, 

39 hospitals—or 65 percent—provided IMD pricing data; in some cases, 

the information reflected purchases made by the health system with 

which the hospital is affiliated or for a point in time during fiscal year 2010.

In addition, 5 of the 6 GPOs, 8 DOD medical centers or hospitals, and the 

VA health care system provided IMD pricing data.16 To compare the 

prices that hospitals paid for cardiac IMDs, we limited our analysis to 

those hospitals that provided detailed information on both the specific 

model and the sale price net of discounts and rebates. Not all hospitals 

provided pricing information for each device model in our study.17

 

12In a total joint replacement, “primary” denotes the original implant and differentiates it 

from a revision total joint replacement which replaces the original implant.

To 

13These hospitals performed at least one implantation procedure for each of the five IMDs 

based on Medicare claims data for 2009. 

14The six GPOs were selected based on their reported 2007 purchasing volume in Health 

Industry Distributors Association, Group Purchasing Organization & Integrated Delivery 

Network: Market Brief (Alexandria, Va.: July 2009).

15We obtained device price data from the VA National Prosthetic Patient Database, which 

contains all IMD price information reported by VA medical centers. We did not use data 

from the National Acquisition Center because certain IMDs, such as coronary stents, are 

not purchased through national contracts. In addition, VA medical centers may obtain 

waivers to purchase IMDs outside of national contracts for medical reasons only.

Therefore, the data on the National Acquisition Center website do not reflect the full range 

of prices that VA medical centers actually pay for IMDs.

16DOD data include IMD pricing information from two of three Navy medical centers, two

Navy hospitals, and four of five Air Force medical centers. Data obtained from the Army 

were not representative of the full range of prices hospitals paid and were not used in this 

analysis. 

17The number of hospitals providing sale price net of discounts and rebates for a particular 

device model ranged from 3 to 19. In addition, to ensure comparability of prices for device 

model types that may or may not be purchased with leads, we removed cases where the 

price reported included leads. A lead is the connection between the heart and the power 

source for an AICD or CRT-D.
 

Page 5 GAO-12-126 Implantable Medical Devices

compare the prices that hospitals paid for orthopedic IMDs, we used 

examples from the information provided by hospitals and GPOs on behalf 

of their member hospitals. The data we obtained on cardiac and 

orthopedic IMD prices are not generalizable. To identify the factors that 

affect the prices hospitals pay for IMDs, we reviewed relevant literature 

and interviewed officials from the 6 GPOs from which we requested 

pricing data, 3 nongovernment hospital systems with the highest 

revenues for 2009 and 2010,18

We conducted this performance audit from June 2010 to December 2011 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

5 large IMD manufacturers that 

volunteered to participate through a trade association, 2 small hospitals 

that performed a low volume of procedures involving orthopedic IMDs 

commonly used among Medicare beneficiaries in 2009, and professional 

associations representing orthopedic surgeons and cardiologists.

Cardiac IMDs include cardiac rhythm management devices (such as 

pacemakers, AICDs, CRT-Ds) and coronary stents. A pacemaker 

monitors the patient’s underlying heart rhythm and delivers an electrical 

pulse to cause the heart to beat at the desired rate. An AICD is similar to 

the pacemaker in design, but is capable of delivering a higher energy 

electrical pulse—called defibrillation shocks—to correct more serious 

rapid and sustained heart rhythm irregularities. A CRT-D is a combination 

of a pacemaker and defibrillator. A coronary stent (either bare metal or 

 

18The three hospital systems were selected based on the reported 2009 revenues in 

Modern Healthcare, Big dividends: annual survey of hospital systems shows a strong 

financial comeback thanks in large part to resurgent investment portfolios (Chicago, Ill.: 

June 2010) and 2010 revenues in Modern Healthcare, A solid year: annual survey shows 

health systems posted strong revenue and earnings, but expenses are also rising 

(Chicago, Ill.: June 2011).

Background 

Device Features and 

Industry Characteristics
 

Page 6 GAO-12-126 Implantable Medical Devices

drug-eluting) is a wire mesh tube used to prop open a blocked coronary 

artery.19

Orthopedic devices include joint implants—mostly commonly hips and 

knees—as well as spinal devices used for spinal fusion. Typically, hip and 

knee implants have a variety of components and are made up of different 

materials, which may be combined into different configurations to make 

the total device. The components and configurations of orthopedic 

devices can vary by manufacturer. For example, for a hip replacement 

with four different components there are different configurations and 

different types of materials (metal, plastic, ceramic) that can be used as 

well as different ways to secure the implant (cemented or fitted into the 

bone with new bone growth to hold the implant in place). See figure 1.

Figure 1: Components of a Total Hip Replacement

The markets for specific cardiac and orthopedic IMDs are generally 

dominated by a few large manufacturers. In the cardiac rhythm 

management segment, the market is dominated by three U.S. 

manufacturers. Also, four manufacturers share the drug-eluting stent 

 

19Some stents are coated with drugs that slowly release and help keep the artery open 

(drug-eluting stents), while others are not (bare-metal stents).
 

Page 7 GAO-12-126 Implantable Medical Devices

market.20 In the hip and knee replacement orthopedic segment, sales by 

four manufacturers accounted for about 83 percent of the market share in 

2009.

Typically, hospitals negotiate IMD prices with manufacturers directly or 

through GPOs. Contract negotiations between hospitals or GPOs and 

manufacturers can occur at the national or local level. A custom or local 

contract establishes a price for products that were not part of the GPO’s 

overall contract portfolio or achieves a better price for a specific product 

than what the national GPO contract offered. Contracts can include an 

agreed-upon price for one or more devices and reflect rebates—an 

agreement by the manufacturer to return a portion of the payment, which 

may depend on a hospital’s commitment to purchase a certain volume.

In addition, hospitals may engage consulting firms that may act as data 

intermediaries by gathering price information from clients and sharing 

benchmarks for IMD costs with them. However, to the extent that such 

information is derived from purchasing agreements containing 

confidentiality clauses, these data intermediaries may be potential targets 

of litigation by device manufacturers.21

Medicare has separate inpatient and outpatient prospective payment 

systems (PPS) for paying hospitals for services provided to beneficiaries 

enrolled in FFS Medicare. Under the inpatient PPS, a hospital generally 

receives a fixed, predetermined payment amount for a bundle of services 

provided during a beneficiary’s hospital stay.22

 

20One of the four manufacturers of drug-eluting stents plans to exit the market by the end 

of 2011, leaving only three manufacturers in that market segment. 

Inpatient payment rates 

are based on Medicare-severity diagnosis-related groups (MS-DRG), a 

system that classifies inpatient stays according to both patients’ clinical 

conditions (the primary diagnosis along with any secondary illnesses and 

21Researchers examining this issue have noted lawsuits alleging violations of 

confidentiality clauses by data intermediaries providing price information to hospitals. See 

Jeffrey C. Lerner, Daniel M. Fox, Todd Nelson, and John B. Reiss, “The Consequence of 

Secret Prices: The Politics of Physician Preference Items” Health Affairs, vol. 27, no. 6 

(2008). 

22Throughout this report, we use the term “stay” to represent a patient’s hospitalization, 

which CMS and hospitals refer to as a discharge for data-reporting purposes.

IMD Purchasing 

Agreements

Medicare’s Payment 

Systems for Hospital 

Services
 

Page 8 GAO-12-126 Implantable Medical Devices

complications developed during the stay) and the procedures patients 

receive.23

Under the outpatient PPS, generally, the unit of payment is the individual 

service. Outpatient PPS rates are based on ambulatory payment 

classifications (APC), a system that classifies services based on their 

similarity in terms of clinical characteristics and cost. For each APC, 

Medicare makes a single bundled payment for the primary service and 

any ancillary or supportive services. For example, the APC payment for a 

pacemaker implantation procedure represents a bundled payment for the 

pacemaker device, routine supplies, and the operating or procedure 

room. An APC payment is calculated by multiplying an APC relative 

weight by the conversion factor, a dollar amount that translates the 

relative weight into dollar amounts.

In general, an inpatient MS-DRG payment is calculated using a 

base payment amount—a per hospital-stay rate for operating costs that 

efficient hospitals would be expected to incur in furnishing covered 

inpatient services—multiplied by a MS-DRG relative weight. The MSDRG relative weight signifies the average costliness of stays assigned to 

that MS-DRG relative to the average costliness of other inpatient stays. 

CMS updates MS-DRG weights annually to incorporate any changes in 

the cost of inpatient care.

24 The APC relative weight measures 

the resource requirements of the service and is based on the median cost 

of services in the APC.25

CMS calculates inpatient and outpatient payments based on data from 

Medicare cost reports and charges from Medicare claims. Each year, 

hospitals submit Medicare cost reports to CMS identifying hospitals’ 

actual costs for services rendered to all patients, not just Medicare 

beneficiaries. Upon a Medicare beneficiary’s discharge, hospitals submit 

CMS updates APC weights annually to account 

for any changes in the cost of outpatient care.

 

23Prior to 2008, CMS assigned inpatient stays to diagnosis-related groups (DRG) which 

classified inpatient stays by patient diagnosis and the procedures they received; CMS 

replaced DRGs with MS-DRGs to better account for severity of illness. 

24CMS initially set the conversion factor so that projected total payments would equal the 

estimated amount that would have been spent under the old cost-based outpatient 

payment system, after correcting for some anomalies in statutory formulas.

25CMS scaled all of the APC relative payment weights to APC 601, a midlevel clinic visit, 

because it is one of the most frequently performed services. 
 

Page 9 GAO-12-126 Implantable Medical Devices

Medicare claims to CMS identifying charges for services delivered to the 

beneficiary—such as procedures involving IMDs.

Medicare does not directly purchase IMDs but accounts for hospitals’ IMD 

prices indirectly. To help set prospective payment rates for inpatient and 

outpatient hospital procedures, Medicare’s payment systems use data 

from cost reports and claims. CMS collects data on hospitals’ costs for all 

services and supplies from Medicare cost reports. The cost reports 

capture data on hospitals’ costs for all services and supplies, including 

IMDs, but do not separately identify specific IMD costs. Rather, hospitals 

report costs for all medical supplies in one category, aggregating the 

costs of low-cost items, such as surgical gloves, with the costs of highcost items, such as cardiac defibrillators and total knee replacements. On 

hospitals’ claims submitted for inpatient services, charges are billed by 

categories of service. For example, an inpatient hospital claim for the 

implantation of an AICD could include charges for an AICD and surgical 

dressings in the supplies category. Using these aggregated cost data, 

Medicare’s inpatient and outpatient payments indirectly account for prices 

hospitals reportedly paid for IMDs.

Compared to hospital cost reports and charges on inpatient claims, the 

data on hospitals’ charges on outpatient claims provide more specific 

information about hospitals’ charges for individual IMDs. This occurs 

because of the way Medicare classifies outpatient procedures for claims 

and payment purposes. Specifically, CMS requires hospitals to include 

device codes on claims where an appropriate code exists to describe a 

device utilized in the procedure. Further charges reported on the 

outpatient claims generally reflect what the hospital reports as the full cost 

of the IMD.

Due to a lag in data, the cost of the newest IMD technology may not be 

reflected in data used to set payment rates. Although CMS uses the most 

recently available hospital claims data in order to help set inpatient MSDRG and outpatient APC payments, the claims reflect data that predate 

the year for which rates are being set by 2 years. For example, 2009 

inpatient payments are based on Medicare claims from 2007.

To better reflect costs of new technology, Medicare makes additional 

payments under the inpatient and outpatient payment systems. These 

additional payments are generally made for 2 to 3 years, until sufficient 

data on hospitals’ new technology costs can be collected and used in 

payment rate setting. For inpatient procedures, CMS makes add-on 

Medicare’s Payment 

Systems Indirectly 

Account for Prices 

Hospitals Pay for 

IMDs; Efforts Are 

Under Way to Better 

Account for These 

Prices 
 

Page 10 GAO-12-126 Implantable Medical Devices

payments—made in addition to the MS-DRG payment—for procedures 

involving new IMDs that meet certain criteria for newness, clinical benefit, 

and cost.26 For outpatient procedures involving new IMD technology, 

CMS makes pass-through payments for eligible new IMDs that can be 

used in an existing service, and new technology APC payments for a new 

procedure involving an IMD that cannot be adequately described by an 

existing APC. Pass-through payments are made in addition to the APC 

payment for the procedure involving the new IMD.27 CMS assigns 

services to new technology APCs based on cost information collected on 

applications for new technology status.28

CMS is taking further steps to better account for hospitals’ reported IMD 

prices in the data it uses to set inpatient and outpatient prospective 

payment rates. Specifically, CMS has modified the way hospitals report 

costs of IMDs on Medicare cost reports. CMS created a new cost 

category called “Implantable Devices Charged to Patients,” which 

requires hospitals to report separately their high-cost IMDs and their other 

lower-cost medical supplies. The new cost category is intended to provide 

CMS with more accurate information about hospitals’ reported costs 

specific to IMDs for use in setting inpatient and outpatient payment rates. 

The revised cost report with the new cost category for “Implantable 

Devices Charged to Patients” was made available for use for cost 

reporting periods beginning on or after May 1, 2009. According to CMS, 

data collected with the revised cost reports will likely be available for 

setting payment rates for 2013.

 

26CMS determines the add-on payment on a claim-by-claim basis; payment is limited to 

50 percent of the hospital’s costs above the standard MS-DRG payment, up to a 

maximum of 50 percent of the estimated cost of the new device. For fiscal year 2012, 

there is one brand-specific new technology eligible to receive an add-on payment. 

27Pass-through payments are based on each hospital’s actual reported cost of the new 

IMD minus the device offset amount—the portion of each APC payment rate CMS could 

reasonably attribute to the cost of the device that the new IMD replaces. As of October 

2011, there are three device categories eligible for pass-through payment. 

28New technology APC payment levels are set at the midpoint range of the cost category; 

for example, payment made for New Technology APC 1507 ($500 to $600) is made at 

$550. In calendar year 2011, there are three procedures receiving payment through a new 

technology APC.
 

Page 11 GAO-12-126 Implantable Medical Devices

In addition to more accurately accounting for IMD costs, CMS intends to 

link payment to the quality and efficiency of care provided—a move 

toward value-based purchasing in Medicare. One of the principles of 

value-based purchasing is having good data on performance; currently 

such data generally are lacking for specific brands of implantable medical 

devices. Most IMDs are introduced as incremental modifications to 

existing devices without studies of performance relative to alternative 

devices and for specific patient populations.29 There are registries of 

postoperative outcomes for some cardiac devices, such as AICDs, but 

none for orthopedic or spinal devices outside of specific organizations 

such as Kaiser Permanente.30,31 Furthermore, because hospital data 

currently are embedded in multiple data systems—such as medical 

records, operating room logs, purchasing department records, and billing 

systems—it can be difficult to match which device brand was used with a 

particular patient.32

 

29James C. Robinson, “Value-Based Purchasing for Medical Devices,” Health Affairs, vol. 

27 no. 6 (2008).

30In 2005, CMS issued a Medicare national coverage policy for AICDs that requires 

providers implanting these devices for certain clinical conditions to enter implant data into 

a clinical registry.

31There is a joint registry under development. The American Joint Replacement Registry 

is a nonprofit organization for data collection and research on total hip and knee 

replacements. This registry is a collaborative effort supported by orthopedic medical 

professional societies, hospitals, health insurers, government agencies, and medical 

device manufacturers.

32Efforts to improve information known about patient safety and medical devices would be 

supported by the implementation of unique device identifiers. The Food and Drug 

Administration Amendments Act of 2007 requires the promulgation of regulations 

establishing a unique device identification system, which will require the devices to bear a 

unique identifier. Pub. L. No. 110-85, § 226, 121 Stat. 823, 854 (codified at 21 U.S.C. 

§ 360i(f)) (the provision allows for the exemption of particular devices or types of devices).
 

Page 12 GAO-12-126 Implantable Medical Devices

From 2004 through 2009, Medicare expenditures for IMD hospital 

procedures increased from about $16 billion to $20 billion. While cardiac 

and orthopedic procedures accounted for nearly all IMD-related 

expenditures, orthopedic procedures accounted for most of the increase 

in such expenditures during our period of study. Utilization increased at a 

faster rate for orthopedic devices and explained the majority of changes 

in expenditures for IMD procedures during the period.

From 2004 through 2009, expenditures for hospital IMD procedures 

increased from $16.1 billion to $19.8 billion, an increase of 4.3 percent 

per year—a rate equal to that of Medicare spending for other hospital 

procedures. Expressed in terms of expenditures per beneficiary—a 

measure which accounts for changes in the size of Medicare’s FFS 

population—IMD expenditures increased from $444 to $561, an increase 

of 4.8 percent per year (see fig. 2). Inpatient expenditures for IMD 

procedures increased from $15.1 billion to $17.0 billion, an increase of 

2.4 percent per year. Outpatient expenditures for IMD procedures 

increased from $1.0 billion to $2.9 billion, an increase of 24.1 percent per 

year. In comparison, Medicare expenditures for all non-IMD procedures 

increased by 4.3 percent per year, 4.8 percent when measured per 

beneficiary. Inpatient and outpatient expenditures for these procedures 

increased by 2.9 and 10.8 percent per year, respectively.

Medicare 

Expenditures for IMD 

Procedures Increased 

from About $16 

Billion to $20 Billion 

from 2004 through 

2009—Driven Largely 

by Increased 

Utilization of 

Orthopedic Devices

Medicare Expenditures for 

IMD Procedures Increased 

from About $16 Billion to 

$20 Billion between 2004 

and 2009, with Orthopedic 

IMD Procedures Driving 

Most of That Growth
 

Page 13 GAO-12-126 Implantable Medical Devices

Figure 2: IMD Expenditures per Medicare FFS Beneficiary, 2004 through 2009

Note: Reported expenditures include Medicare’s payment to the hospital for the set of services 

associated with the procedure performed. The other IMD category includes neurological and 

outpatient orthopedic IMD procedures.

As figure 2 indicates, orthopedic and cardiac procedures accounted for 

nearly all IMD-related Medicare expenditures from 2004 through 2009. 

Furthermore, during this period, the share of inpatient orthopedic 

expenditures relative to all IMD-related Medicare expenditures increased 

from 38 percent to 45 percent. In addition, an increasing share of cardiac 

procedures shifted to the outpatient setting. Generally, Medicare pays 

hospitals a relatively lower rate for the same procedures delivered in the 

outpatient setting than in the inpatient setting. Specifically, as a share of 

Medicare’s total IMD expenditures, inpatient cardiac IMD procedures 

decreased from 56 percent to 40 percent while outpatient cardiac IMD 

procedures increased from 5 to 12 percent.
 

Page 14 GAO-12-126 Implantable Medical Devices

From 2004 through 2009, orthopedic procedures accounted for most of 

the growth in Medicare IMD-related expenditures. Medicare expenditures 

for orthopedic IMD procedures increased from $6.1 billion to $9.0 billion, 

an increase of 8.1 percent per year.33,34 Procedures related to knees, 

hips, shoulders, and the spine accounted for nearly all of Medicare’s 

orthopedic IMD expenditures in 2009.35 The average growth rate of 

expenditures related to each of these procedure types exceeded that of 

non-IMD hospital procedures.36

 

33Medicare expenditure growth rates for orthopedic IMD procedures exceeded that of nonIMD hospital procedures throughout our period of study.

Spinal fusion procedures had the highest 

growth in per beneficiary expenditures—more than doubling during the 

period (see fig. 3).

34Revisions, procedures that replace part or all of an IMD, accounted for 8.9 percent of 

these expenditures in 2004 and 11.0 percent in 2009, increasing from $0.5 billion to 

$0.9 billion.

35For example, in 2009, these procedures accounted for 98 percent of the program’s 

orthopedic IMD expenditures.

36On a per beneficiary basis, expenditures related to hips, shoulders, and the spine grew 

the most between 2007 and 2009. 
 

Page 15 GAO-12-126 Implantable Medical Devices

Figure 3: Orthopedic IMD Expenditures per Medicare FFS Beneficiary, 2004 through 

2009

Note: Reported expenditures include Medicare’s payment to the hospital for the set of services 

associated with the procedure performed.

Cardiac procedures accounted for relatively little of the growth in 

Medicare IMD-related expenditures from 2004 through 2009. Medicare 

expenditures for cardiac IMD procedures increased from $9.8 billion in 

2004 to $10.3 billion in 2009, an increase of 1.2 percent per year. In 

2009, procedures involving stents, pacemakers, AICDs, and CRT-Ds 

accounted for 93 percent of expenditures for cardiac IMD procedures.37

 

37Other cardiac IMDs included vascular grafts and vena cava filters.

Over the entire 2004 through 2009 period, only cardiac expenditures 

related to AICD procedures increased at a higher annual rate than that of 

non-IMD procedures. On a per beneficiary basis, expenditures peaked in 

2006 but reached their second lowest point of the period in 2007, largely 

resulting from expenditures for coronary stent procedures, which 
 

Page 16 GAO-12-126 Implantable Medical Devices

decreased by 15 percent that year (see fig. 4). Furthermore, inpatient 

expenditures for cardiac IMD procedures generally decreased over the 

2004 through 2009 period, while those expenditures in the lower payment 

outpatient setting generally increased. Inpatient expenditures for cardiac 

IMD procedures reached their peak of $10.0 billion in 2005 but dropped to 

$7.9 billion in 2009, decreasing 5.5 percent per year over that period. In 

contrast, outpatient expenditures for cardiac IMD procedures increased 

from $0.8 billion in 2004 to $2.4 billion in 2009, an increase of 

25.5 percent per year. During that period, expenditures for coronary stent, 

AICD, and pacemaker procedures decreased in the inpatient setting but 

increased in the outpatient setting.38

 

38Medicare’s Recovery Audit Contractor program may be associated with both the shift of 

cardiac IMD procedures from the inpatient to the outpatient setting and the higher 

outpatient expenditure growth rates for IMD procedures compared with non-IMD 

procedures. From 2005 to 2008, these audits collected overpayments for inpatient 

defibrillator and pacemaker procedures that could have been performed in the outpatient 

setting, possibly prompting other hospitals to change their admissions patterns. 
 

Page 17 GAO-12-126 Implantable Medical Devices

Figure 4: Cardiac IMD Expenditures per Medicare FFS Beneficiary, 2004 through 

2009

Note: Reported expenditures include Medicare’s payment to the hospital for the set of services 

associated with the procedure performed.

From 2004 through 2009, utilization of IMD procedures increased from 

about 1.3 million cases to about 1.6 million cases, an increase of 

3.8 percent per year.39

 

39We use the term “case” to indicate a claim where an IMD procedure drove the Medicare 

payment. 

Per 10,000 beneficiaries, the utilization of IMD 

cases increased from 357 to 440, or an increase of 4.3 percent per year.

During our period of study, inpatient IMD utilization increased from 

1.1 million cases to 1.2 million cases, an increase of 1.4 percent per year.

In contrast, outpatient IMD utilization increased from about 180,000 cases 

to about 363,000 cases, an increase of 15.0 percent per year.

Utilization Increased at a 

Faster Rate for Orthopedic 

Devices Compared with 

Cardiac Devices and 

Explained Most of the 

Changes in IMD-related 

Medicare Expenditures 

from 2004 through 2009
 

Page 18 GAO-12-126 Implantable Medical Devices

Utilization increased at a faster rate for orthopedic devices compared with 

cardiac devices. From 2004 through 2009, orthopedic IMD procedure 

utilization increased from about 556,000 cases to about 697,000 cases, 

yielding an annual growth rate of 4.6 percent per year or 5.1 percent 

when measured per beneficiary. While utilization per beneficiary of 

orthopedic IMD procedures related to knees and hips were highest,40 the 

fastest increase in utilization of orthopedic IMD procedures came from 

those related to spinal fusions, increasing at a rate of 12.1 percent per 

year (see fig. 5).41 In contrast, utilization of cardiac IMD procedures 

increased from about 705,000 cases to about 797,000 cases, yielding an 

annual growth rate of 2.5 percent per year, 3.0 percent when measured 

per beneficiary. Not all cardiac procedures followed a steady increase in 

utilization. For example, between 2006 and 2007, utilization associated 

with stent procedures decreased by 9.3 percent and increased thereafter 

(see fig. 6).42

 

40During our period of study, utilization of knee and hip replacements grew at annual rates 

of 5.5 and 2.2 percent, respectively.

Inpatient utilization of cardiac IMD procedures decreased 

from 154 to 140 cases per 10,000 beneficiaries, while such utilization in 

the outpatient setting increased from 41 to 85 cases per 10,000 

beneficiaries during the period. Per-beneficiary utilization related to 

cardiac stents, AICDs, and pacemakers all decreased in the inpatient 

setting and increased in the outpatient setting.

41The percentage of spinal fusions performed with either a cage or bone morphogenetic 

protein increased throughout the period, going from 42 percent in 2004 to 60 percent in 

2009. The percentage of spinal fusions that used both a cage and bone morphogenetic 

protein increased from 7 percent in 2004 to 17 percent in 2009.

42A 2007 New England Journal of Medicine study that found treating Stable Coronary 

Disease with stent-related procedures did not produce improvements compared to other 

types of treatment may be a factor in the decrease in stent utilization. See William Boden, 

et al., “Optimal Medical Therapy With or Without PCI for Stable Coronary Disease,” The 

New England Journal of Medicine, vol. 356, no. 15 (2007).
 

Page 19 GAO-12-126 Implantable Medical Devices

Figure 5: Orthopedic IMD Utilization per 10,000 Medicare FFS Beneficiaries, 2004 

through 2009
 

Page 20 GAO-12-126 Implantable Medical Devices

Figure 6: Cardiac IMD Utilization per 10,000 Medicare FFS Beneficiaries, 2004 

through 2009

Between 2004 and 2009, the overall increase in per-beneficiary Medicare 

expenditures for IMD procedures resulted more from increased utilization 

than from an increased average payment per claim. Specifically, our 

analysis shows that utilization contributed to 67 percent of the increase in 

such inpatient expenditures. Utilization and average payment growth 

rates varied by year during the study period. The largest rate of increase 

in inpatient per-beneficiary utilization occurred from 2007 to 2008. During 

this time period, CMS adjusted inpatient discharge payment rates to 

better distinguish beneficiaries with comorbidities and complications,43

 

43CMS transitioned to MS-DRGs, replacing DRGs as the method for grouping patient 

stays in determining payments. MS-DRGs better capture severity of illness differences 

among patients. 

which was followed by the only decrease of average inpatient 

expenditures. The average IMD-related inpatient payment decreased by 
 

Page 21 GAO-12-126 Implantable Medical Devices

5.4 percent while per-beneficiary utilization of those same procedures 

increased by 6.5 percent. Similarly, utilization contributed to 69 percent of 

the increase in per-beneficiary Medicare expenditures for outpatient IMD 

procedures.

Among orthopedic IMD procedures, utilization contributed to the 

majority—62 percent—of the overall growth in per-beneficiary Medicare 

expenditures between 2004 and 2009. Utilization contributed to most of 

the increased expenditures for three of the four main types of orthopedic 

IMD procedures (see fig. 7). Four of the five orthopedic IMD procedures 

with the largest expenditures in 2009 had growth that resulted more from 

increased utilization than an increased average payment.44

Figure 7: Contribution toward Per-Beneficiary Expenditure Growth between 2004 and 2009, by Orthopedic IMD Procedures

Note: Reported expenditures include Medicare’s payment to the hospital for the device as well as the 

set of services associated with the procedure performed.

The extent to which utilization drove changes in per-beneficiary Medicare 

expenditures for cardiac IMD procedures varied by hospital setting.

Decreased utilization contributed to 94 percent of the decrease of such 

inpatient expenditures between 2004 and 2009. The decrease in 

utilization accounted for all of the decrease in per-beneficiary inpatient 

 

44These five procedures were total knee replacement, total hip replacement, lumbar and 

lumbosacral (spinal) fusion with a posterior technique, partial hip replacement, and total 

shoulder replacement. They represent 77 percent of the Medicare expenditures for 

orthopedic IMD procedures in that year. Per-beneficiary utilization of the partial hip 

replacement procedure decreased during our period of study, and therefore, all of its 

increase in per-beneficiary expenditures resulted from an increased average payment per 

claim.
 

Page 22 GAO-12-126 Implantable Medical Devices

expenditures related to pacemakers. Decreased utilization contributed to 

61 percent and 52 percent of the decrease in per-beneficiary inpatient 

expenditures related to AICDs and coronary stents, respectively. In 

comparison, increased utilization contributed to 67 percent of the increase 

in per-beneficiary outpatient expenditures for cardiac IMD procedures.

Increased utilization contributed to 79 percent and 93 percent of the 

increase in such expenditures related to pacemakers and AICDs, 

respectively. Furthermore, increased utilization explained 59 percent of 

the increase in per-beneficiary outpatient expenditures related to coronary 

stents.

Complete and comparable information on the prices hospitals paid for the 

various models of IMDs was limited, as reflected in responses to our data 

request. The price information that was provided showed substantial 

variation in the prices hospitals paid for the same type of device. A 

particular factor that influences the prices hospitals pay for IMDs is 

hospitals’ ability to manage relationships with physicians and 

manufacturers.

Detailed information on both the specific model purchased and the sale 

price net of discounts and rebates is needed to accurately compare the 

amount hospitals paid for various types of IMDs.45

 

45The size of rebates and discounts may differ based on the volume of devices purchased 

and the extent to which a hospital purchases a predetermined number of a certain device 

from a particular manufacturer.

However, not all 39 

hospitals, 5 GPOs, the VA health care system, and 8 DOD medical 

centers or hospitals responding to our request provided us with such 

detailed information for three types of cardiac IMDs and two types of 

orthopedic IMDs purchased during fiscal year 2010. Only 31 hospitals, 

1 GPO, and 1 DOD medical center provided detailed information on 

cardiac device prices, and only 14 hospitals,1 DOD medical center, and 

1 DOD hospital provided detailed information on orthopedic device prices 

Information Available 

on the Prices 

Hospitals Paid for 

Selected IMDs Shows 

Substantial Variation; 

Hospital-Physician 

Relationships Are a 

Particular Influence 

on Prices Paid

Various Factors Limit the 

Availability of Detailed 

Information on the Prices 

Hospitals Paid for Selected 

IMDs
 

Page 23 GAO-12-126 Implantable Medical Devices

(see table 1).46

Table 1: Type of Detailed Information Reported on Cardiac and Orthopedic IMDs, Fiscal Year 2010

Information from the remaining respondents did not 

adequately reference the IMD by model, provide the sale price net of 

discounts and rebates, or both.

Price data provided indicated 

IMD Respondent

Number of 

respondents

Both specific 

model and sale 

price net of discounts 

and rebates

Specific 

model only

Sale price net of 

discounts and 

rebates only

Other 

data

Cardiac 

d

Hospitals 39 31 8 0 0 

GPOs 5 1 4 0 0 

DOD Medical Centers or

Hospitals

3 a 2 1 0 0 

VA Health Care System 1 0 0 0 1 

Orthopedic Hospitals 38 b 14 2 20 2 

GPOs 2 c 0 2 0 0 

DOD Medical Centers or 

Hospitals

8 2 1 1 4 

VA Health Care System 1 0 0 0 1 

Source: GAO.

Note: In some cases, hospitals and DOD medical centers or hospitals reported detailed pricing or 

model information for some devices, but not others. We considered an entity to have reported 

detailed information on specific model or sale price net of discounts and rebates if we could 

accurately identify the model or price—including all price discounts and rebates—for at least one of 

the devices reported by the entity.

a

Three of the eight DOD medical centers or hospitals that reported IMD pricing information included 

pricing information for cardiac devices. Some of these medical centers or hospitals indicated that 

cardiac procedures were consolidated in certain medical centers, while orthopedic procedures were 

performed more widely. In addition to the eight Air Force and Navy medical centers or hospitals that 

provided IMD pricing information, the Army also provided information for the highest volume 

purchaser of each type of implantable medical device. However, these data were excluded from our 

analysis because they may not represent the Army’s range of prices—both high and low—that other 

hospitals were able to provide.

b

One hospital did not report information on orthopedic device prices.

c

 

46Eight Air Force and Navy medical centers or hospitals provided IMD price information. 

The Army also provided information for the highest volume purchaser of each implantable 

medical device model. However, these data were excluded from our analysis because 

they may not represent the Army’s range of prices—both high and low—that other 

hospitals were able to provide. 

Information provided by GPOs reflected the experience of their member hospitals. Although we did 

not request model numbers for orthopedic devices from GPOs, two GPOs provided this information.
 

Page 24 GAO-12-126 Implantable Medical Devices

d

The other data category includes respondents that provided information on cardiac or orthopedic 

IMD prices, but which did not include information on the specific model or sale price net of discounts 

and rebates for the device.

The respondents included in our study identified several reasons why 

detailed information on the model-specific sale price net of discounts and 

rebates is limited. First, many respondents indicated that the price 

information they provided for at least one device did not account for all 

discounts and rebates obtained. This issue was cited by 21 hospitals, 

4 GPOs, and 1 DOD medical center. Officials from 1 hospital that 

reported receiving a rebate from a manufacturer for meeting certain 

volume targets stated that it would be difficult and time-consuming to 

determine the proportion of the rebate to attribute to each product.

Officials from other hospitals and a DOD medical center noted that, 

because discounts were negotiated at the hospital system level, they 

lacked information on the discount amount. Similarly, 4 of the 5 GPOs 

told us the prices they provided from their member hospitals did not 

account for discount and rebate amounts because member hospitals did 

not necessarily report that information.47

Second, a number of entities stated that the majority of contracts between 

hospitals and manufacturers include confidentiality clauses that generally 

limit hospitals from sharing price information with third parties. 

Specifically, all of the five manufacturers, five GPOs, three hospital 

systems, and one of the two small hospitals we interviewed reported that 

all or almost all of their contracts included language that restricted 

information disclosure to some extent. For example, some confidentiality 

clauses allow hospitals to share pricing information with other hospitals 

that are part of their system, and others do not. Among our respondents, 

four hospitals and one GPO stated that confidentiality clauses limited 

them from providing us with detailed pricing information for devices from 

certain manufacturers. Another GPO indicated that confidentiality clauses 

precluded some member hospitals from reporting pricing information to 

them. The extent to which confidentiality clauses may have affected 

responses to our request for pricing information is uncertain.

 

47Officials from one GPO stated that even though their price data do not take rebates or 

other discounts into consideration, the data provide a valuable and reasonably accurate 

understanding of the range of prices being paid in the marketplace.
 

Page 25 GAO-12-126 Implantable Medical Devices

Finally, some respondents cited data retrieval or quality issues as limiting 

their ability to provide detailed price information. One hospital official 

reported that the components used for total knees and hips are recorded 

on paper invoices rather than in an electronic data system and that 

additional staff would be required to retrieve the hand-written component 

information. We also found data quality issues with the pricing information 

provided by VA and DOD. Specifically, in the VA database, product 

identifiers were entered in an inconsistent fashion or did not match, 

making it difficult to aggregate the data in a meaningful way. Among the 

issues identified with pricing information submitted by DOD, one hospital 

reported it could not calculate the price for primary total knees, and 

instead provided us with a range of prices per manufacturer. In addition, a 

DOD medical center only provided estimates rather than actual prices it 

paid for primary total knees.

Even when respondents report detailed information on the prices 

hospitals pay for IMDs, differences in how hospitals purchase the parts or 

components needed for certain procedures may limit the comparability of 

the information. Specifically, the parts or components needed for a certain 

cardiac and orthopedic procedure may be purchased together or 

separately. For example, some hospitals purchase AICDs and CRT-Ds 

with leads, while other hospitals purchase the leads separately from the 

device. Given these differences, prices for IMDs that include leads—

which can cost up to several thousand dollars—cannot be meaningfully 

compared to prices that exclude leads. Similarly, some hospitals 

purchase the components used for a primary total knee or primary hip 

implant together, while other hospitals purchase each component 

separately. As a result, some hospitals reported one product number that 

reflects multiple components, while others reported separate product 

numbers for each component used, making it difficult to compare the 

prices for devices purchased as whole to devices purchased component 

by component.

Data from those respondents that provided detailed information on the 

specific model purchased and sale price net of discounts and rebates 

indicated substantial variation in the prices hospitals paid for the same 

device model. Among the 31 hospitals that provided detailed price 

information on cardiac IMDs, we found that for AICDs and CRT-Ds the 

difference between the reported lowest and highest model-specific prices 

Information from Study 

Respondents Indicates 

Substantial Price Variation 

for Some IMDs
 

Page 26 GAO-12-126 Implantable Medical Devices

was several thousand dollars.48 For example, the difference between the 

lowest and highest price hospitals reported paying for a particular AICD 

model was $6,844. The difference between the highest and lowest price 

reported for another AICD model was $8,723. The price differences for 

the remaining two AICD models in our study fell in between $6,844 and 

$8,723. (See table 2.) The median prices across the four AICD models 

ranged from $16,445 to $19,007.49

Table 2: Median Prices and Differences between the Lowest and Highest Prices Hospitals Paid for Cardiac Devices, Fiscal 

Year 2010

The other models of cardiac devices 

for which we collected pricing data also showed substantial variation in 

prices.

Type of device Number of models

Range of median 

prices 

Range of differences 

between the lowest 

and highest modelspecific price 

Drug-eluting coronary stents 5 $1,700 to $1,800 $309 to $828 

Automated implantable cardioverter defibrillator (AICD) 4 a $16,445 to $19,007 $6,844 to $8,723

Cardiac resynchronization therapy defibrillator (CRT-D)a 5 $19,370 to $22,603 $3,035 to $9,247

Source: GAO analysis of hospital-reported pricing data.

Notes: Results are based on implantable medical device pricing data submitted by 31 hospitals and 

include all discounts and rebates the hospital reported receiving. We limited our analysis to the most 

common devices for which these hospitals provided pricing data. Not all hospitals provided pricing 

information for each device model in our study; the number of hospitals providing sale price net of 

discounts and rebates for a particular device ranged from 3 to 19. Hospitals that contracted with 

GPOs may have obtained other financial benefits not reflected in the net sale price, such as a portion 

of the administrative fees GPOs received from manufacturers.

a

AICD or CRT-D prices that included leads were omitted from this analysis.

 

48Two DOD medical centers reported prices for cardiac IMDs that were generally greater 

than the prices paid by the 31 hospitals that provided detailed price and model 

information. One DOD medical center reported detailed pricing information for all three 

types of cardiac devices, including four drug-eluting cardiac stent models, one AICD 

model, and one CRT-D model. For four of the six device models, the price paid by the 

medical center exceeded the highest price hospitals paid for the same device model by as 

much as $3,530. For the other two device models, the prices paid by the medical center 

were less than $100 below the highest price paid by those hospitals. The other DOD 

medical center reported a price for one drug-eluting cardiac stent model that was $220 

more than the highest price paid by any of the hospitals that provided detailed pricing 

information for the same device. 

49It is possible that hospitals that contract with GPOs receive other financial benefits not 

reflected in sales price, such as a portion of the administrative fees GPOs receive from 

manufacturers.
 

Page 27 GAO-12-126 Implantable Medical Devices

Further analysis of the pricing data shows that the variation in prices paid 

by hospitals for IMDs cannot be attributed exclusively to a few hospitals 

that were outliers in terms of the prices they paid. Among the nine IMD 

models included in our study for which at least 10 hospitals reported 

prices, the prices at the 90th percentile exceed those at the 10th 

percentile by about 14 percent to over 40 percent, depending on the 

specific IMD model. On average, the price paid by the hospitals at the 

90th percentile for the nine IMD models was about 31 percent greater 

than the price paid by the hospitals at the 10th percentile. (See text box 

for a hypothetical example of how hospitals can be affected by price 

variation for IMDs.)

Hypothetical Example of How Price Variation for IMDs Can Impact Hospitals

The variation in prices hospitals pay for the same device can have a substantial impact 

on the share of a hospital’s Medicare payment that is available to cover other expenses 

and profit. For example, assume that one hospital pays about $14,500 for a specific 

AICD model and another hospital pays about $21,500 for the same device model—a 

difference of about $7,000. In addition, assume that both hospitals pay an additional 

$3,000 for leads. In 2010, the MS-DRG payment for the implantation of an AICD was 

approximately $32,500.a Therefore, the hospital that paid $14,500 for the AICD model 

would have a little less than half of its MS-DRG payment to allocate to other costs 

associated with the IMD procedure, overhead, and profit. In contrast, the hospital that 

paid $21,500 for the same device would have only about a quarter of its MS-DRG 

payment available for these items.

a

The MS-DRG payment amount may vary depending on geography and other factors.

It was more difficult to compare prices for orthopedic IMDs because of the 

greater variation among device configurations. However, the data on 

orthopedic IMDs reported by hospitals and GPOs—which may not 

capture all discounts and rebates—provided some evidence of substantial 

price variation. For instance, one hospital reported spending about $4,500 

for a specific primary total hip construct in 2010. In comparison, a GPO 

provided information showing that one of its members paid about $8,000 

for the same device construct, or 78 percent more. Similarly, a GPO 

provided data on two of its member hospitals that purchased the same 

primary total knee construct. One hospital paid about $5,200 for the 
 

Page 28 GAO-12-126 Implantable Medical Devices

primary total knee construct, while the other hospital paid about $9,500, 

or 83 percent more.50

The influence of physicians on hospitals’ IMD purchasing decisions is a 

factor particular to the IMD market that affects prices hospitals pay. While 

physicians generally are not involved in price negotiations, they often 

express strong preferences for certain manufacturers and models of 

IMDs, known as physician preference items.51

Hospitals face a number of obstacles when it comes to working with 

physicians to consider cost when making IMD decisions. First, 

confidentiality clauses included in IMD contracts may bar hospitals from 

sharing price information with some physicians, making it difficult to get 

physicians the information they need to consider cost when making 

decisions about devices. According to one GPO, some hospitals 

restricted by confidentiality clauses have resorted to using colored 

Physicians may seek 

certain products in which they have high confidence in terms of their 

value to patient care and reliability, after promotion by device makers, or 

for other reasons noted below. To the extent that different physicians in 

the same hospital have preferences for IMDs made by different 

manufacturers, it may be difficult for the hospital to obtain volume 

discounts by consolidating its purchases from particular manufacturers. 

That is, individual hospitals or hospital systems may have less bargaining 

power relative to the few cardiac and orthopedic IMD manufacturers. In 

contrast, if the physician-hospital relationship is strong, the GPO can 

consider purchasing from multiple IMD suppliers and thus, gain leverage 

in negotiations. This could result in lower prices for hospitals.

 

50GPOs provided information on the sale prices its members reported paying for specific 

IMDs, but did not confirm that the reported price was net of all discounts and rebates. Two 

hospitals that provided information on the prices they paid for orthopedic devices also 

provided information on the discounts and rebates they received from specific 

manufacturers during our study period. The highest discount and rebate amount reported 

by these hospitals averaged about 5 percent for one device model. If we applied these 

discounts and rebates to the higher of the two prices in our orthopedic device examples, 

the difference between the prices would still be substantial—about 69 percent for the hip 

example and about 74 percent for the knee example.

51Physicians tend to use devices developed by one particular manufacturer, often due to 

having trained in a hospital that used that manufacturer’s products or past experience with 

a manufacturer’s products, and may be reluctant to switch manufacturers and learn how to 

implant another manufacturer’s device using a new set of instruments.

Hospitals’ Ability to 

Manage Relationships with 

Physicians Is a Particular 

Factor That Influences 

Prices Paid for IMDs
 

Page 29 GAO-12-126 Implantable Medical Devices

stickers to indicate to physicians which devices are the high, medium, and 

low-cost options. Second, physician-hospital relationships regarding 

preference items frequently must contend with strong physicianmanufacturer relationships. According to another GPO, physicians rely on 

manufacturer representatives to provide technical support during 

procedures involving IMDs, including setting up the operating room, 

consulting with the physician about the procedure, and programming 

devices, such as AICDs and CRT-Ds. In addition, some physicians might 

be loyal to certain manufacturers with whom they have consulting or

professional relationships.

Some GPOs noted that, despite the financial impact of physician 

preference, hospitals are likely to accommodate physicians’ IMD 

preferences in order to retain patient referrals to their facilities. One GPO 

commented that hospitals that ask physicians to be sensitive to IMD 

prices have encountered push back from some physicians. Another GPO 

cited a market where hospitals’ attempts at cost-savings led some 

physicians to migrate away from their facilities. A third GPO said that 

because physicians are highly dependent on their relationship with 

manufacturer representatives who provide the physicians with technical 

support, they may not be willing to switch device models. An association 

representing orthopedic surgeons told us that if physicians are not 

involved in the negotiation process, it is difficult to encourage them to 

switch devices. If manufacturers determine that a physician is unwilling to 

switch device models, they can be more aggressive in negotiations, which 

could result in higher prices for hospitals.

In addition to hospitals’ ability to manage relationships with physicians, 

device manufacturers we interviewed noted several other factors that 

influence the prices hospitals pay for IMDs. They pointed to marketplace 

dynamics—the degree of competition within a local market and the 

market power of hospitals purchasing the devices—as key influences.

Additionally, they noted that the support offered by manufacturers, such 

as device servicing agreements and training, as well as the terms and 

length of the contract itself, play a role in price negotiations. Finally, the 

manufacturers told us that the extent to which changes in device 

technology improve patient care affects what hospitals pay for IMDs.

The lack of price transparency for the IMDs we examined makes it difficult 

to know whether hospitals are achieving the best device prices. This lack 

of price transparency may have implications for Medicare because 

excess or unnecessary IMD costs that hospitals incur may be passed on 

Concluding 

Observations 
 

Page 30 GAO-12-126 Implantable Medical Devices

to the Medicare program. In 2009, Medicare spent over $19 billion for 

hospital procedures involving IMDs. A substantial portion of this amount 

may be attributable to the cost of the devices themselves, but exactly how 

much is unknown, in part, because hospitals purchase the IMDs and 

Medicare does not track IMD prices or how much individual hospitals pay 

for them.

Although Medicare’s payment approach provides hospitals with an 

incentive to seek the best price on IMDs, hospitals may vary in their ability 

to achieve the best price because of limited price information and 

bargaining power. While we were able to obtain detailed IMD pricing data 

from 31 of the 60 hospitals we contacted, the effort revealed the 

challenges in compiling and analyzing meaningful price information even 

from this relatively small number of hospitals. Furthermore, we observed 

substantial variation in the prices that these 31 hospitals paid for cardiac 

devices. Some hospitals paid several thousand dollars more than other 

hospitals paid for the exact same device produced by the same 

manufacturer. These data suggest that some hospitals have substantially 

less bargaining power with the small group of companies that 

manufacture particular IMD devices and consequently face challenges in 

obtaining more favorable prices.

Physician preferences for particular manufacturer’s devices and models 

may further complicate hospitals’ bargaining power. Such preferences 

may shape hospitals’ purchasing decisions and limit their ability to obtain 

volume discounts from device manufacturers. Moreover, many device 

manufacturers require confidentiality clauses that prohibit hospitals from 

disclosing their negotiated prices with third parties, which may include 

physicians. A hospital that is constrained in sharing price data with its 

physicians loses an opportunity to enlist their assistance in the hospital’s 

efforts to be a prudent purchaser of IMDs.

The Department of Health and Human Services and VA reviewed a draft 

of this report and provided technical comments, which we incorporated as 

appropriate. DOD also reviewed a draft of this report and had no 

comments.

Representatives from AdvaMed, the trade association representing 

device manufacturers, reviewed relevant portions of the draft and 

commented that there are many other factors—in addition to the hospitalphysician relationship—that influence IMD prices. AdvaMed 

representatives noted that confidentiality clauses are not unique to the 

Agency and Industry 

Comments
 

Page 31 GAO-12-126 Implantable Medical Devices

IMD market. AdvaMed representatives also provided technical comments, 

which we incorporated as appropriate.

A representative from the American Hospital Association (AHA) also 

reviewed relevant portions of the draft and stated that confidentiality 

clauses that restrict hospitals from informing physicians about IMD prices 

inhibit hospitals from fully integrating care and making informed, costconscious decisions. Furthermore, the AHA representative noted that 

wide variation in IMD prices reported by hospitals shows that much of 

device price is driven by negotiations; therefore, lack of IMD price 

transparency puts hospitals at a disadvantage. The AHA representative 

also provided technical comments, which we incorporated as appropriate.

As we agreed with your offices, unless you publicly announce the 

contents of this report earlier, we plan no further distribution of it until 

30 days from its date. We are sending copies of this report to the 

Secretary of Health and Human Services, the Secretary of Defense, the 

Secretary of Veterans Affairs and other interested parties. The report will 

also be available at no charge on our website at http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix I.

Sincerely yours,

James C. Cosgrove

Director, Health Care
Appendix I: GAO Contact and Staff 

Acknowledgments

Page 32 GAO-12-126 Implantable Medical Devices

James C. Cosgrove, (202) 512-7114 or cosgrovej@gao.gov

In addition to the contact named above, individuals making key 

contributions to this report include Jessica Farb, Assistant Director; 

Gregory Giusto; Luis Serna III; and Ann Tynan. George Bogart and 

Krister P. Friday also provided valuable assistance.

Appendix I: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Acknowledgments 

(290857)
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