Mark-up of Drugs and Medical Supplies in Private Practice

Mark-up of Drugs and Medical Supplies in Private Practice

I recently introduced a new antiadhesion product to the hospital I work in. After reviewing all the documents, they decided to get the item for me to use in the operation theatre. To my surprise the mark up on this product was so much higher than a similar product I have been using for many years. I enquired about  this discrepancy.  The answer I got was that the antiadhesion I was using earlier was placed on consignment whereas the new item was bought by the hospital. When a drug is placed on consignment the mark up is lower than when it  is bought outright by the hospital. For those not familiar with this system, consignment items are not bought by the hospital but are provided by vendors, who are only paid by the hospital if the items are used. As the items are not paid for beforehand by the hospital, the markup on these items is much lower than if the items were already paid for by the hospital.

My next question is, how do you decide which items should be placed on consignment and which to be outright purchases by the hospital. The answer I got was that, the hospital buys fast-moving items but places the slow-moving ones on consignment. Then, I asked why they decided my new item should be a fast moving item whereas the similar item I was using earlier was on consignment? The answer I got was that, the management decides on the issue. I could not get more information from the management.

Why are mark-ups necessary?

Hospitals are expensive places to manage. Money needs to be made and just charges on bed and facilities are insufficient to create sufficient profits for a hospital. Mark ups on drugs and medical supplies play a big part in creating revenue for a hospital. So all hospitals mark up products used in the hospital. This is the norm, not only in hospitals but also in all industries. For example, if you buy beer in a restaurant the price will be lower than if you were to buy it in a fancy pub. It is all in the mark-up. The question is, what is considered a reasonable mark-up?  An old recommendation by the Malaysian Medical Association was that a 30% mark up was considered reasonable. I don’t know who decided on this figure but it certainly sounds reasonable.

How is mark-up done?

Every hospital has its own formula how to mark-up a drug or a medical device. The general principle is that outpatient mark-up is lower than inpatient mark-ups. Another principle I have outlined above is that mark-up on consignment items are always lower than items bought outright by the hospital.

Many vendors give a discount when drugs or medical devices are bought in bulk. Unfortunately many hospitals do not pass the benefit of this lower purchase price to patients and generally the mark-up will be the same. Even items given free by vendors for trial are sometimes charged to the patient. In some hospitals disposable items are refurbished and reused. When this is done there are various formulas used but generally the charges to the patients will be divided by the number of time the hospital allows that instruments to be reused so the cost to the patient will be lesser but the the overall mark-up will be generally higher.

Should hospitals inform doctors of their mark-up policy?

When a hospital purchases a drug or a medical device, the  burden will be on the purchaser to ensure that the doctors in the hospital use these items quickly. When a hospital pays for the item, money is tied up and only fast usage will release it of this burden. So it is up to the doctors to use these items. If the mark-up is very high then the doctors will be reluctant to use the items. Therefore, it is essential to inform doctors how the mark-up is done so that they can understand and help utilize these drugs or devices. Hospitals should not say that it is their prerogative and that it none of the doctors’ business dealing with mark-ups. Management must remember that if doctors do not use these items, then the hospital will be stuck with a large inventory.

Who monitors these mark-ups?

In out-patient hospital pharmacies, competition with retail pharmacies will help monitor mark-ups. If the mark-up is too high at the hospital pharmacy, resident doctors will not prescribe drugs for their patients from the hospital pharmacy. Some doctors have contracts that forbid them from writing prescriptions for patients to buy their medication from retail pharmacies. Many patients, especially those buying recurring medication for chronic diseases like hypertension and diabetes will buy their medication from the cheapest resources. In this country, there is even no need for a doctor’s prescription to buy such drugs directly from a retail pharmacy. So the “monitor” here is competition with retail pharmacies. This will ensure that the mark-up is kept reasonable.

As for inpatients, doctors are obliged to use drugs and medical supplies from the hospital. Patients are not even allowed to bring their own regular medication. Even items like maternity pads and diapers which are something personal, are not allowed to be brought in by patients and will be charged by hospitals. In some countries patients are even allowed to bring in pre-packed equipment/disposables/drugs which they buy from a pharmacy to be used by doctors in the hospital. This practice is unheard of in Malaysia.

Who monitors mark-ups of items used during in-patient admission? The first will be the doctors themselves. If they find that a drug or medical supply is too expensive, then they will not use it. This will make the hospital enquire why a drug or product is not utilized and when the reason given is that the mark-up is too high, the management may reduce the mark-up or remove the product from their inventory.

The second monitor is probably the insurance industry. Nowadays, almost all insurance companies ask for a detail-itemized bill so that they can easily see the cost of a product and compare them with various other hospitals in Malaysia. They can easily come down on a hospital that marks up heavily on their products. I am unsure as to whether the insurance companies actually scrutinize every item charged by a hospital. However, I know for sure that doctors’ charges are carefully scrutinized and even an extra charge of RM 100 is usually flagged.

Why is the government not regulating mark-ups?

We have the Private Healthcare and Facilities and Services Act that details how a hospital should be set up and the how much a doctor can charge. However, there is nothing on what a hospital should charge for their services and products. There is also nothing on how much mark-ups should be. A study by Kah Seng Lee et all entitled “ A systematic review of pharmaceutical price mark-up practice and its implementation” published in Exploratory Research in Clinical and Social Pharmacy 2021 concluded that the average mark-up of drugs in Western countries is lower at 4% to 25% of the original purchase price, compared to Asian countries, where it is up to 50%. I know for sure that markups can even go up to even several hundred percent of the purchase price, especially for cheap drugs. The reason for the lower mark-up in Western countries is that there are regulatory bodies monitoring this. This is not done in Malaysia. Perhaps it is because a large percentage of private hospitals are owned and controlled by Government Linked Companies so money made in these hospitals actually goes to government coffers. There is a conflict of interest so the government “turns a blind eye” on such regulations. 

What advice can I give doctors joining private practice?

  1. This article is to make you aware that there is such a thing as mark-ups. You must be aware of this and utilize drugs and medical supplies that are cost effective to your patient.
  2. Don’t think that because it is an insurance patient, you can use anything you want. I know of doctors who will open a Harmonics, Ligasure, 4 disposable trocars, disposable scissors etc for a simple laparoscopy case. Insurance companies are watching and may refuse payment if the bill becomes exorbitant
  3. Try to engage with the hospital management to let them know of your displeasure about any mark-ups. They may not care about your concerns but keep trying.

Selva

16/5/2022

I would like to thank
My wife Sarojini for editing this document
Dr Gunasegaran for reading through this document and giving good suggestions.

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Dr. Selva

Dr. Selva

Dr S. Selva (Sevellaraja Supermaniam) is a Consultant Obstetrician and Gynaecologist and a subspecialist in Reproductive Medicine at a private hospital in Melaka, Malaysia. He heads the O&G unit and the IVF Centre at the hospital.

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