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Generics in Orthopaedics: How to Implement the Impossible

Posted in The Top Line | Oct 2012 | Comments (2)

Tags: healthcare spendingcost reductionorthopaedic implant costsgeneric

Generic Orthopaedic Implants
Blair Rhode, M.D., Orthopaedic Surgeon,
Rhode Orthopedic Group  
Dr. Rhode discusses the current state and future of 
generic orthopaedic implants at OMTEC 2013. 

People don't change (or buy) until the personal pain of change is less than the pain of staying the same.

The commoditization of orthopaedic devices has been a slow crawl. Even though 75% of orthopaedic technology is expired or nearly expired intellectual property, these devices continue to command top dollar from hospitals and surgery centers. To formulate a strategy for implementation of generics, one must understand the reasons for the lack of movement to a value based model. 

First and foremost, we're still making money. It hasn't gotten bad yet. According to the World Health Organization, total healthcare spending in the U.S. was 15.2% of the GDP in 2008; the highest in the world.1 In 2007, the U.S. spent $2.26 trillion on health care, or $7,439 per person. From January 1, 2005, to December 31, 2007, the average facility charges for total knee replacements increased from $35,262 to $41,998 (19.1%). (Data from PearlDiver Technologies) Many downward cost pressures are making their way into the system, though. Medicare continues to threaten a 27% cut to physician reimbursement in 2013. Payment bundling provides another downward cost pressure. 

Another reason is that hospitals and surgery centers continue to allow surgeons to control implants. Surgeons see no benefit in using low cost alternatives. The sales rep provides a service (a sense of security and stability in an environment where the hospital provides neither). Hospitals and surgery centers have trended towards a system of “dumbing down” and cross-training such that all personnel can be present in all types of surgery, but are unprepared for any of them. The sales rep is the only constant. There is also no financial incentive to use generics. Even if the surgeon has ownership, it is often so minute that the profit motive does not outweigh the service provided by the rep. A component of envy even plays into the lack of physician participation. Lowering implant costs and raising profit margin is seen as making someone else more money. Often ownership structure is seniority-based, which means that the most productive surgeons will be making someone else proportionately more money. “Why do I want to make that guy more money?”

Hospitals also don't want the responsibility back. Sales reps and consignment allow the hospital to give responsibility to the implant company for implants and instruments. Hospitals are so poor at knowing their actual costs that they cannot even comprehend that there is a cost built into giving this control away. They are paralyzed by the thought that they would have to manage all that goes into coordinating the inventory and instruments for a complex procedure like a total knee. With so many surgeons using so many different device variations, who can blame them?

Finally, the propaganda machine is working. There is an active effort to paint generics as lower quality. There is a belief that low cost means low quality. How could it be the same quality if it is offered at a 75% discount? The users don't realize that it is about process. The same contract manufacturers make most orthopaedic implants. The materials are the same. These are FDA-cleared products. The cost lies in the process. The cartel spends 43% of their costs on SG&A (sales and marketing). The infrastructure of these companies is built top-heavy. They boast beautiful headquarters and corporate jets. Often they are publically-traded companies that have grown accustomed to fat profit margins (35%). If everyone used generic shoulder anchors for all U.S. shoulder cases, a $500 million per year industry would become a $75 million one. How do you tell your shareholders that you are going to decrease their return by 85%? Generics are a simple concept. Sell a lot for a little. Again, it's about process.

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George 11/24/2013 10:20 PM
Interesting comment on competition as there is NO competition between surgeon costs. There is competition between implant vendors. Minor competition between hospitals at best.

I do not believe hospitals truly work in a free market system
Justin McKay 11/14/2012 12:00 PM
This is re-freshing affirmation of the DIRECT initiative that we are building for Spinal Implants at Nexxt Spine. I kept saying, “Amen Dr. Rhode” as I was reading this article as he illustrated several KEY points that are very relevant. It’s time to wake up and realize that yesterday’s purchasing methods are just that, and that there is a new way to do business with greater pricing transparency. This was a great article!