When Nola Droop suffered a bout of breathlessness in 2016, she had no idea it meant her heart was failing.

Key points: Documents obtained by ABC show extent of lucrative contracts heart-device supplier has with private hospitals, clinics

Documents obtained by ABC show extent of lucrative contracts heart-device supplier has with private hospitals, clinics Cardiologists raised concerns about possibility of high payments to influence doctors' choices of devices for patients

Cardiologists raised concerns about possibility of high payments to influence doctors' choices of devices for patients Medical-technology industry says rebates common practice, private hospitals say not illegal

The grandmother was in good health and had no other signs of illness, so her doctor's diagnosis shocked her.

"He said that I had no hope, no chance of living," the 78-year-old said.

"He just said, 'I recommend a pacemaker'. There was no talk about options at all."

When she woke up in a private hospital she had a state-of-the-art pacemaker in her chest. It was made by global device-manufacturing giant St Jude Medical, which is now owned by healthcare company Abbott.

The only cost to her and husband Ivan for her life-saving surgery was the $250 excess on their private health insurance.

The insurer footed the bill for the surgery and the device, which ran into the tens of thousands of dollars.

They were nothing but thankful.

But unbeknown to Nola, the piece of technology keeping her heart beating may have attracted a lucrative payment that's been loosely termed a "rebate".

Now an ABC investigation has found private hospitals and clinics are getting between 5 and 50 per cent of the value of the devices as rebate payments in cash, or in-kind, for using a particular company's brand.

Under one agreement, a clinic attracted rebates of up to 50 per cent for purchases that added up to more than $3 million.

Legal experts and industry insiders say this payment is better described as a kickback, it could be costing the health system millions, inflating insurance premiums, and ultimately impacting on public-hospital patients.

Do you know more about this story? Email Specialist.Team@abc.net.au

Secret documents show hidden payments

Pacemakers cost between $4,000 and $40,000. ( ABC News: Alison Branley )

Documents obtained by the ABC have shed light on the complex series of payment agreements between an international supplier and many of the major private hospitals around Australia.

While it's long been suspected this practice has been widespread, the documents show for the first time just how lucrative the contracts are.

Pacemakers cost between $4,000 and $40,000, meaning clinics can receive tens of thousands of dollars in cash payments each quarter.

One private hospital got $47,396 in rebates in one quarter in 2017, while a private clinic netted $40,560 in one quarter in payments in 2016.

Professor Thomas Faunce is both a doctor and lawyer who is an expert in health law at Australian National University (ANU).

He said the rebates could lead to gold-plating in the private system.

"One of the most interesting features of this information is if you get a higher-costing device, you'll get a higher rebate, so this creates an incentive for doctors to implant a higher-rebate device," he said.

The documents show one clinic received more than $40,500 in rebates in one quarter in 2016. ( ABC News: Chris Anderson )

Cardiologist Dr Bradley Wilsmore said rebates of up to 40 to 50 per cent seemed "exorbitant".

"That's potentially a huge amount of money," he said. "I would suspect that there's a lot more potential for it to have an impact on the choice of device."

In a statement, the Australian Private Hospitals Association said hospitals did not interfere with doctors' decisions or "influence them to use different prostheses".

The rebate, it suggested, covered the costs to private hospitals of storing, maintaining, and covering wastage of medical devices, which was not covered by the price set by the Government.

"Doctors providing services in private hospitals are not employed by the hospital. They are independent practitioners," the statement said.

"Many surgeons operate in a number of private and public hospitals and are likely to choose a hospital that supplies products they like to work with."

The peak body for the medical-technology industry is the Medical Technology Association of Australia (MTAA). Its chief executive, Ian Burgess, said the agreements were "standard commercial arrangements" that could apply in any industry.



How does it work?

Under the scheme, a doctor recommends a pacemaker for a patient. The doctor then informs the private hospital and that hospital requests that device from the manufacturer.

The hospital invoices the health insurer, which pays the hospital for the full cost of the pacemaker, and this invoice is then paid in full back to the manufacturer.

The manufacturer then "rebates" a proportion of the total cost back to the private hospital. That rebate is subject to negotiation and varies between hospitals.

Who is benefitting?

The documents show some of Australia's largest private hospitals are receiving payments.

Invoices obtained by the ABC show some hospitals run by industry heavyweights HealthScope and Healthe Care have been receiving payments.

Healthe Care is the third-largest private hospital operator in Australia and runs dozens of hospitals, and has recently been bought by international giant Luye Medical.

Eastern Heart Clinic also receives rebates, and not-for-profit operators also named on invoices include a St John of God hospital and a South Australian private hospital.

Photographs of binder folders, titled "Rebates", from inside an international supplier appear to show corporate giant Ramsay Health Care also received payments, along with private hospital operators Epworth, and not-for-profits Uniting Care in Queensland, Cabrini, Sydney Adventist Hospital, and St Vincent's Health Australia hospitals.

The binders appear to show agreements between the device supplier and a host of Australian private-hospital operators. ( ABC News )

Hospitals named have told the ABC they did not mandate a clinician's choice of device and doctors were obligated to choose what they thought was best for their patient.

A spokeswoman for Ramsay Health Care said they bought cardiac devices from all available manufacturers.

A spokeswoman for Epworth Hospitals said their cardiology department bought prostheses from 14 different suppliers in the most recent financial year.

A spokeswoman for St John of God Hospital said the highest rebates or "discounts" it received were "usually in the order of 2 to 3 per cent".

"Any saving from volume discounts that may have been achieved usually barely cover the handling and other costs associated with all the touch points of purchasing and utilising a product," she said.

Many of the publicly listed hospital groups implicated reported massive profits in 2017, with Ramsay Health netting $543 million globally and HealthScope making $180 million.

Cardiologists speak out

Cardiologist Dr Bradley Wilsmore said rebates of up to 40 to 50 per cent seemed "exorbitant". ( ABC News: Alison Branley )

The rebates have become so pervasive in private hospitals, they have prompted some specialists to raise concerns about transparency.

Dr Wilsmore told the ABC that sometimes the payments from manufacturers came in the form of in-kind rebates, rather than cash.

It included expensive catheters used in a special heart procedure called ablations, which are not covered by health insurers or Medicare.

"There's a potential to do good but what actually happens with that money is very difficult to know," Dr Wilsmore said.

"If it's going to the hospital profit … then that would certainly not sit well."

Leading Melbourne cardiologist David O'Donnell said most specialists had little understanding of the financial dealings operating behind the scenes.

Cardiologist David O'Donnell. ( ABC News: Alison Branley )

"I think that most cardiologists will be aware that there are corporate relationships between each of the device companies in the major private hospitals," he said.

"But the exact details … certainly never been made clear to me."

Dr Wilsmore said he personally had only been approached once by a private hospital to use a preferred supplier, if "all else was equal" for patient need.

"I definitely would never be told to be using one device over another. On one occasion it's been suggested that if there was no other clinical benefit, it might be worth using the company that does provide a rebate," he said.

The ABC understands private hospitals could exert power over specialists through their controls over who can operate in their centres.

A spokeswoman for Ramsay Health Care rejected that suggestion.

"Private hospitals operate in a competitive environment and doctors can choose to take their patients to other facilities," she said.

Why is it a problem?

The concern is that the medical-devices industry could be using the payments to influence cardiologists' choices of devices for their patients.

While specialists said most heart devices were largely similar, the ABC has found there are differences that are often not discussed with patients.

How do heart devices differ? Some are safe for MRI scans, while others are not

Some are safe for MRI scans, while others are not Some have better remote monitoring services

Some have better remote monitoring services Whether they sit comfortably in the body

Whether they sit comfortably in the body Cosmetic visibility in the chest, for example, some have rounded edges

Cosmetic visibility in the chest, for example, some have rounded edges Pacing of left chamber or both chambers

Pacing of left chamber or both chambers Pacing based on lung use or heart beats

Pacing based on lung use or heart beats Surgeon experience with device

Surgeon experience with device Battery life

These include battery life, cosmetic appearance through the chest, functionality, remote monitoring, and whether patients can have an MRI.

"There is definitely some need to be able to access and utilise all of the company's devices because different patients have different needs," Dr Wilsmore said.

"If patients are not getting all of the options available to them because of rebates to the private system, then that is something that should be aggressively pursued."

Health-law experts said the payments could be anti-competitive and a possible breach of section 45 of the Trade Practices Act.

"I'd call them kickbacks," Professor Faunce said.

Professor Faunce said the rebates could lead to gold-plating in the private system. ( ABC News: Sophie Scott )

He believed it was feasible doctors in private hospitals were being pressured to use devices and potentially, "if [they] step outside this arrangement … that will in fact threaten their job security".

Mr Burgess from the MTAA disputes this.

"These are standard commercial arrangements that apply across all markets in our economy," he said.

While the Australian Competition and Consumer Commission [ACCC] looked into the scheme 15 years ago under different market arrangements and found no problems, experts say it's time regulators looked again.

"Now that the information has come to light that these rebate schemes are working … the ACCC needs to take action," Professor Faunce said.

A section of leaked documents showing a schedule of rebates. ( ABC News: Chris Anderson )

He added it was health-insurance customers and Australian taxpayers, through the Private Health Insurance Rebate, who ultimately footed the bill.

"If a private health insurer has to pay a largely inflated amount for a particular medical device, that flows through to every single taxpayer in the Australian community," he said.

Professor Faunce said it also locked smaller manufacturers and distributors out of the market, and was an ethical breach of an area known as "financial informed consent".

"It's a problem for patients because patients may not get the device they need," he explained.

"It's a problem for patients because they're paying more than they should, and it's a problem for patients because the system is being corrupted."

He said there was also a case to be made that it defrauded the Federal Government.

In a statement, the Australian Private Hospitals Association said it was, "not aware of any legal finding that rebates breach any Australian laws".

The MTAA's Mr Burgess said the payments were not kickbacks and were not anti-competitive.

"We fully support unfettered surgeon choice," he said.

"If there was any action to constrain that choice, whether it be a private hospital or private health insurer, we would have opposed that."

He said the industry had already lost $1.1 billion after a round of reductions to the set price of prosthesis that had already led to health insurance premium reductions.

"Those cuts are challenging for industry, they will hamper our ability to invest in innovation, to invest in research and development and they have led to job losses," Mr Burgess said.

Public hospital patients also suffer

The prices for these devices when they're bought by a private hospital have a minimum cost that is set by the Federal Government on its official Prostheses List.

The minimum prices on this list were reduced in October 2017 following a Senate inquiry, but the ABC's investigation has found the devices are still being sold to the private system for well above their worth.

Public and private hospital estimates for pacemakers, based on public hospital data released to a Senate inquiry in 2016 and the 2018 Prostheses List. ( ABC News: Chris Anderson )

In contrast, public hospitals are negotiating bulk deals where they get the devices much cheaper than they're worth. The problem is sometimes they're older, more basic models.

Industry sources have told the ABC manufacturers negotiate these cheap deals with the public hospitals because it helped surgeons become familiar with their devices.

The public system then essentially acted as a practice ground for their products, making specialists more likely to recommend those devices to patients during their private sector work, where they're sold at an inflated price.

But the ABC has learned that to compensate for the price reductions in the public system, often only older or less-sophisticated models are typically on offer.

Dr Wilsmore told the ABC most doctors put their patients first and always used the device that was most suitable from those available.

"Certainly there are some instances where a patient might get a more basic model [in the public system] than they would receive in the private system," he said.

"It's far from ideal and it's not equitable health care."

For every $200 million spent in the private health system, health insurance premiums go up 1 per cent. ( ABC News: Margaret Burin, file photo )

How many people have pacemakers? It's estimated between 120,000 and 240,000 Australians have a pacemaker or heart device

It's estimated between 120,000 and 240,000 Australians have a pacemaker or heart device Some are pacemakers alone, some have defibrillators

Dr O'Donnell said there were differences between the public and private systems.

"In the private hospital I choose the device; in the public system we're given a list of devices which are appropriate in terms of functionality, in terms of price that we're allowed to choose from," he said.

"Public patients don't miss out but they certainly don't get the latest generation of technology as a first-line device in all cases.

"On an occasion I believe that a public patient needs a device that is not usually available to public patients, we will apply for that device and it will almost certainly always be granted."

Despite differences in price and functionality, all patients the ABC spoke to said options were not discussed.

The medical-technology industry said it was not appropriate to compare the two systems "like-for-like".

Mr Burgess said the high cost of cardiac devices in the private system incorporated the costs of ongoing technical support and monitoring for the life of the product, which could be a decade.

"Whilst in the public system that cost is borne by the public system," he said.

All four major manufacturers are providing the rebate

There are four major pacemaker companies — St Jude Medical, Medtronic, Boston Scientific and Biotronik.

"As far as I'm aware, all four companies would be providing the rebate," Dr Wilsmore said.

Conservative estimates suggest St Jude Medical, which occupies about 20 per cent of the cardiac device market, spent $5.7 million on rebates in 2017 alone.

St Jude has made hefty payouts in the US to settle claims it influenced hospitals and physicians.

The MTAA said its members were bound by a strong code of practice.

"It specifically prohibits any form of inducement being provided to a healthcare professional or to a surgeon to influence their choice," the MTAA's Mr Burgess said.

Boston Scientific said in a statement it acted, "with the highest level of integrity and business ethics, and we adhere to our own business code of conduct as well as the industry code of practice".

Medtronic said volume discounts were "not unique to the medtech industry" and commercial-in-confidence. Biotronik said it complied with all applicable Australian laws and regulations.

St Jude did not respond to the ABC's enquiries.

What needs to happen?

Professor Faunce said the ACCC should investigate the rebate system.

"Now we have concrete evidence it's taking place, it mandates our regulators to take some action," he said.

"If we don't rein in these kind of schemes going on then we're going to find it hard to get the money for public hospitals."

Dr Wilsmore said better communication and transparency was needed.

"If patients are not getting all of the options available to them because of rebates to the private system then that is something that should be aggressively pursued. I would like to think that the doctors would not do that," he said.

"I think transparency is fundamentally important so patients know exactly what they're getting and why are they getting that."

He said government also needed to take a second look at the prosthesis-list system.

"In the public system … it's much more of a free market," Dr Wilsmore added.

The MTAA said it supported more transparency and had proposed a price-disclosure model that it has suggested to Health Minister Greg Hunt.

The Australian Private Hospitals Association said it believed rebates could be replaced with a separate supply charge.

Medtronic, which also makes cardiac devices, said there was an "urgent need" to reform the prostheses list to include non-implantable technologies like catheters used in ablations.

Nola Droop said her device had served her well and she was happy with it. But she was unaware of the rebate system and said it needed reform.

"Well, if it causes other people to pay more, I think that's wrong," she said.