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 drug-eluting) is a wire mesh tube used to prop open a blocked coronary artery. 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. 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 market.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. 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 Inpatient payment rates provided during a beneficiary's hospital stay.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 complications developed during the stay) and the procedures patients receive. 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 MS- DRG 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. 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. the resource requirements of the service and is based on the median cost of services in the APC. CMS updates APC weights annually to account for any changes in the cost of outpatient care. CMS 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. 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 high- cost 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 MS- DRG 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 payments--made in addition to the MS-DRG payment--for procedures involving new IMDs that meet certain criteria for newness, clinical benefit, and cost. 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. CMS assigns services to new technology APCs based on cost information collected on applications for new technology status. 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. 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. 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. 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. 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. 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. 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. Procedures related to knees, hips, shoulders, and the spine accounted for nearly all of Medicare's orthopedic IMD expenditures in 2009. The average growth rate of expenditures related to each of these procedure types exceeded that of non-IMD hospital procedures. Spinal fusion procedures had the highest growth in per beneficiary expenditures--more than doubling during the period (see fig. 3). 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.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 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. 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.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. Per 10,000 beneficiaries, the utilization of IMD 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, 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). 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). 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. 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,which was followed by the only decrease of average inpatient expenditures. The average IMD-related inpatient payment decreased by 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. 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 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. 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 (see table 1).adequately reference the IMD by model, provide the sale price net of discounts and rebates, or both. 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 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 hospital- physician relationship--that influence IMD prices. AdvaMed representatives noted that confidentiality clauses are not unique to the 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, cost- conscious 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. 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.

Summary:
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. 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.