Prostheses List ReformReducing cost by increasing efficiency and competition in the Australian private health system

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By: Nick Taylor

Note:

The speaker is a partner at law firm Jones Day who represents Applied Medical which has several listed prostheses. However, the views expressed in this presentation are personal views and are not to be attributed to Applied Medical, Jones Day or any other party.

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Disclosure of interest

The issue• Australia has a unique regulatory price fixing system for the reimbursement of listed prostheses.

• Under this system, health insurers are funding the purchase of devices in Australia at 400% the internationally prevailing prices.

• According to conservative estimates, this is wasting $590m to $700m per year.

• Although this issue is contrary to National Competition Policy, it is outside the ACCC’s law enforcement jurisdiction.

• Despite being alerted to this issue multiple times, the Department of Health has taken no action.

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Listed devices• The ordinary meaning of “prostheses” is:

“an artificial part supplied to remedy a deficiency, e.g. A false breast, leg, tooth, etc”

• However under the Private Health Insurance Act a “prostheses” is any item that the Minister puts on the “Prostheses List”. By policy, the Minister chooses only to list TGA approved items and otherwise the criteria are vague and have changed over time.

• The TGA determines if the product is safe for use and the List solely exists to set reimbursement rates. An aspect of the reimbursement rate is, however, related to the product’s functionality and efficacy.

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Listed devices• Examples of the 10,000 items on the list:

• Donaldson Grommet, Endocorp Pty Ltd -­ $20.

• MobiFUSER -­ Disposable sterile non electronic elastomeric infusion device -­ $84.

• Intraocular Anterior Chamber Lens, Bausch & Lomb -­$156.

• Laparoscopic clip applier, Applied Medical -­ $412.

• VerteLoc Spine System, Prism Surgical Designs -­$4,400.

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Why the List exists and how it works• In the early 1980s patients could obtain prostheses:

• without charge in a public hospital;; or

• have the procedure in a private hospital and claim the costs on private health insurance (but gap payments began to become significant).

• Patients increasingly moved to the public system and, over time, doctors were required to perform more procedures in the public system which was an exacerbating factor in the NSW doctors dispute.

• Legislation was introduced to establish a Prostheses List and require all insurers to reimburse all listed items at the amount set. Choice without gaps is an central principle.

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Setting “the number”• Over the last 20 years the Department has struggled to find an efficient process and fair/efficient reimbursement figure for each item.

• The first problem: full product choice without gaps would mean every device manufacturers can demand any amount they please.

• The second problem: the task of working out what an fair/efficient price is for 10,000 items every 6 months is an impossible task.

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• After trying many other methods, now:

• Reimbursement amounts are based on what device manufacturers propose without constraining these amounts to what is fair/ efficient/ competitive.

• “Groupings” of similar products are established and a single minimum benefit limit is set based based on the price proposed by one of them using an arbitrary so-­called “25% utilisation policy” which is not distilled into writing.

• If a device is proven to have superior performance its proponent can select a higher amount.

• Any device manufacturer can offer a lower benefit limit (but to do so is commercial suicide).

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Setting “the number”

Procurement models• In most countries:

• procurement professionals dominate the process.

• public hospital system: tenders for prostheses to obtain the lowest possible price.

• private hospitals or insurers: tenders or negotiations to obtain the lowest possible price.

• In Australia:

• public hospital system conducts tenders for prostheses to obtain the lowest possible price.

• private hospital system conducts negotiations to “divvy up” the value obtained from the full regulated reimbursement between the device manufacturer and the hospital.

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Procurement models

DeviceSupplier

Hospital Insurer

Rebated value $750

“Sticker Price”$1,000

Fullregulated

Amount$1,000

In this example, the hospital is guaranteed to receive $1,000 and has negotiated a rebate of $750 which accrues as profit for the hospital.

CASE STUDY: Laparoscopic clip appliers

$0$50$100$150$200$250$300$350$400$450

Supplier A

Supplier B

Supplier C

Australian ASP

Estimated Minimum Net Price to Private HospitalsUS ASP

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Supplier A

Laparoscopic clip appliers are surgical tools designed to facilitate ligation of small structures, such as ducts and vessels during minimally invasive surgery.

Max Value of Rebates to hospitals

All these items have the same TGA and PLAC approvals.

Supplier B

Supplier C

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If the rest of the listed prostheses could realise only HALF the savings realised in the clip applier category…

Annual Prostheses Spend

37% Savings

• $1.6B

• $592M

Potential Impact

Attempted redress of these issues• The ACCC has investigated but the fundamental competition problem is not collusive – it’s regulatory.

• National Competition Policy Agreements require the Commonwealth to refrain from imposing regulatory impediments to competition (but these agreements are government-­to-­government agreements without teeth).

• The Harper review into competition recommended this issue should be examined but another $600m has been wasted since the report with no governmental response.

• Applied Medical has taken Federal Court proceedings concerning the setting of benefit limits for laparoscopic clip appliers (this is before the courts and the details cannot be discussed).

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Prostheses List Mission Creep• “Mission creep” has impacted the price regulation framework. It is now failing providers, payers and patients particularly in low-­risk, high-­volume areas.

Restricted and Foreclosed Markets• The current regulatory framework prevents competition by suppliers, resulting in higher prices for payers and ultimately subscribers.

Australians Pay Exorbitant Prices via Unnecessarily Inflated Insurance premiums • Minimum benefits aside, even the net prices (taking into account rebates) are significantly higher in the Australian private health system than in the public system, and multiple times higher than in other countries.

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Summary