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Medical Devices are a Ripoff

So much of the discussion about healthcare costs revolves around the costs and benefits of a given technology. The analysis usually begins with the assumption that a given tests "costs X dollars". It then goes on to do a highly detailed analysis of the cost savings of managing a given disease or detecting something early rather than late.

This whole approach is misguided to begin with for one simple reason - the starting assumption. Who says that the technology has to cost X in the first place?

Here's my basic gripe - why can we buy such incredible technology for so little in the consumer space, and a very basic device intended for medicine is so expensive? Yes, we've heard all the answers before - research is expensive, FDA approvals are expensive, the market size is small, and on and on. Sometimes this is true, most times this is just one massive excuse for price gouging the healthcare system.

I'm going to highlight a few examples in the future, but here's one example I saw at a medical conference recently. I won't mention the company or the measurement the device makes, out of respect for the people involved. The device is an electronic instrument that makes a measurement. The salesman tells me that it costs about $2 per measurement.

"Two dollars per measurement?" I ask. "Why does it cost anything at all to turn on an instrument and make a quick measurement?"

"Well, this part here wears out and is disposable, so it has to be replaced every 200 tests, and it costs about $400."

Now we're in credibility territory I've rarely encountered, even in a car dealer showroom.

The electronic component that supposedly "wears out" happens to be a part whose life is measured in tens of thousand of hours. In this case, the part is used for less than one minute per test. Being utterly conservative, one could probably replace the part every 6,000 tests. Second, the cost of this disposable assembly is probably less than $50. In short, the "cost" of the test should be 0.8 cents.

So here's the reason it is sold for $400. Medicare reimburses this test for just under $4. The company wants to share that revenue stream with the physician, so they create a disposable element that captures half the revenue.

And THIS is why so many medical devices cost what they cost - because their price is based entirely on how much a company can capture of the Medicare payment for using the device. If you dropped the Medicare reimbursement by 75%, you'd miraculously find that companies can profitably sell their devices for 75% less than they had been doing before.

My point is this - ask not what cost benefit a given technology provides at the current pricing. Ask instead what the technology should cost such that it is beneficial both economically and medically to the patient.

Of course you're now going to ask whether the Thinklabs Digital Stethoscope is a ripoff. Consider this - a "good" mechanical stethoscope sells for about $150, and our device can be found for about $200-$250. Our stethoscope has all the mechanical assemblies of a conventional stethoscope, plus all the electronic and audio technology to make it what it is. And for all that, you're paying an incremental amount more than the conventional device. Meanwhile, the cost of making the Thinklabs stehtoscope is many multiples of the cost of making the old stethoscope.

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