A 'toxic web' threatening to strangle value in Australia’s health system


Dr Rachel David, the CEO Private Healthcare Australia, says the current approach to setting prices for medical devices means Australians pay significantly more than consumers in comparable countries.

The failure of the Federal Government’s price-setting scheme for medical devices and implants (the ‘Commonwealth Prostheses List’ or ‘PL’) to deliver value for Australian consumers is well documented. Private Healthcare Australia (PHA) has campaigned for years about the unfairness of the scheme that sees Australian consumers paying 30-100 per cent more for commonly used generic medical technology than comparable countries around the world. This is a key driver of premium increases and intergenerational inequity in private health insurance.

What is less obvious is the toxic web of unintended consequences that has spread as a result of this flawed regulatory regime, which threatens the sustainability of Australia’s world-class health system. There are five serious problems with the government fixing prices for generic devices which are outlined below.

1. It is anti-competitive, causing the price of old technology to spiral upwards

By fixing prices at globally high levels for commodity products, the Prostheses List has effectively crushed competition based on price. We are still paying premium prices for generic technology. Most of the groups on the Prostheses List consist of items that are generic and commoditised in the rest of the world. Over time, the costs of manufacturing go down, and prices should come down with them.

The artificially high prices also mean the world’s seven largest big MedTech companies have zeroed in on the honeypot in Australia and have taken ownership of the supply chain. Small firms that don’t have the resources to channel into rewarding doctors and hospitals for their custom are frozen out, regardless of how low they get their costs. This has flattened any prospect of getting an Australian MedTech manufacturing industry off the ground, something we will inevitably need to consider in light of the massive supply chain disruption caused by the COVID-19 pandemic.

2. It creates inappropriate influence based on sales revenue, not clinical data

Big MedTech has created an enormous salesforce in Australia to maximise its returns from this distorted market. Inflated prices have paid for an army of sales representatives. The influence starts early. Trainee surgeons are first approached by the reps while working in the public hospital system. They are bombarded with offers of fellowships, education and training grants and overseas travel.

In many hospitals, the sales reps are permitted to follow the surgeon into the operating theatre, whether or not this is clinically required or the patient has consented.

The lack of transparency around the influence of multinationals was addressed decades ago with the pharmaceutical industry but big MedTech has not followed suit. Arguably this is a bigger problem with implanted technology because if a medicine has side effects the patient can stop taking it. It is not so easy to remove an implanted medical device.

3. The supply chain is not transparent, and funds earmarked for consumers are siphoned off for providers

The Prostheses List consists of fixed fees for over 11,000 separate items. These are often sold as a bundle with a discount or rebate to hospital groups who then claim each individual item from health funds at the full list price. The effect of this is to divert members’ funds earmarked for their surgery to the hospital groups. It is unknown what happens to the money as it is rarely reported in a transparent way.  Prices for medical devices are paid for by Australian families paying private health insurance premiums, with government support through the rebate. Australians deserve to know where their money is going, if not directly to pay for medical devices.

4. Overpricing generic medical items destroys innovation

Innovative products are more expensive to produce and research and development costs need to be recouped. There is no incentive for big MedTech to innovate in design or supply chain in Australia when the price of older, commoditised technology is set so high. It is much more lucrative to sell old technology at higher prices than invest in innovation. Furthermore, incentives for Australian manufacturing startups to compete on value have effectively been eliminated.

Paying the real global market price for generic medical technology will enable headroom for genuine innovation which benefits Australian patients.

5. Large scale tax avoidance by the big MedTechs is enabled by the Prostheses List

Fixed-fee-for-item pricing has incentivised the big MedTech multinationals to create transfer prices for medical devices and implants which have become totally uncoupled from the cost of goods or patient value. The funds are shuffled through multiple tax havens and materialise as huge profits margins overseas. In contrast to this, big MedTech claims zero value-add in Australia and pays an average of 2.4 per cent in tax!

So what should we do?

The Federal Government announced a $22 million package to reform medical device funding regulations in this year’s Federal Budget. With $2 million of the $5.5 million paid by health funds in medical device claims each day being shunted offshore as profit for big MedTech, reform is urgent if we are to achieve downward pressure on premiums. The Government has committed to reducing the cost of overpriced items and reform the way these devices are paid for. This will transfer value from big MedTech back to Australian consumers - health funds have agreed to pass on all savings as a result of this measure to their members.

The broader impact of the market failure of medical device funding via the Prostheses List on the whole health system, including surgery in public hospitals, should be acknowledged. The toxic web of sales-driven value extraction woven by big MedTech in Australia must be urgently dismantled and value returned to Australian doctors and their patients.