A FAILED MARKETPLACE IN HIP REPLACEMENTS: (NY Times Aug 4 2013 page 1)

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A hip replacement in the US can cost over $100,000. The same procedure in Belgium is $13,660.  Each hip replacement uses comparable equipment and has equivalent outcomes.

 

This pricing differential is the result of a “failed marketplace” for healthcare services in the US.

The Belgian hip replacement for $13,660 included a Zimmer made hip, all doctors’ fees, operating room charges, crutches, medicine, a hospital room for five days, a week in rehab and a round trip ticket from the U.S. Belgium  has a national healthcare scheme that pays for 80% of costs. Patients are responsible for 20% or buy private insurance to cover this cost.

The Zimmer artificial hip costs about $350 to manufacture in the U.S.  Foreign hips can be manufactured for $150. There are five major manufacturers of these artificial hips. Competitors have been kept out of the U.S. market. The five companies develop intense brand loyalty with surgeons through financial dealings. Zimmer paid a penalty of $169.5M to the US Justice Department for paying “kickbacks” to orthopedic surgeons.

Hospitals typically pay $4,500 to $7,500 for each artificial hip.  These numbers increase dramatically with the cost of installation equipment and hospital markups.  These increases bring the total US hip replacement costs to around US$100,000. In Belgium, the hospitals pay $3,000 per hip and mark it up by $180 per implant. Total hip replacement costs in Belgium are under $14,000.

The US marketplace for healthcare devices and services has “sticky pricing” in which prices remain high or increase over time instead of dropping. This is an example of a “failed marketplace”.

Zimmer can charge $14,000 per hip implant instead of $1,000.  These manufacturers are profit maximizers. That is what they learned in business school. There are no regulations on implant pricing. A strong lobby keeps it that way.

In contrast, an “efficient marketplace” has real competition which drives prices down. Eventually there is commodity pricing of the product.

In an efficient marketplace, innovation is the key to new and improved products with higher pricing attached to new features and benefits which are advantages for the consumer. In this way, the consumer wins, not the manufacturer.