This article was written by Blair Rhode, MD, Sports Medicine Orthopedic Surgeon and owner, RoG Sports Medicine.
Orthopedic implants in the United States represent a $20 billion per year industry. Seventy-five percent of the orthopedic implant industry consists of devices that are expired or soon to be expired IP (intellectual property). Typically, when a device has expired IP, manufacturers or their competitors begin to sell it as a value proposition. The reason we allow a company to have patent protection is to reward them for their innovation for a period of time. The orthopedic industry has been successful in never allowing their implants to behave in a normal market pattern. They always have been able to charge full price without letting normal market efficiencies take effect.
When a person goes to buy a new LCD television monitor, their biggest concern is that tomorrow there will be a larger and cheaper version available. This is the value of free market innovation. When this business model has been applied to the areas of medicine where it's allowed, similar results have been achieved. When LASIK eye surgery first became available, the procedure cost in excess of $4,000 per eye. Today, ADs promote $269 LASIK procedures. On top of that, the results have improved with new technological innovation. This is also witnessed in plastic surgery, walk-in medical clinics and mail order pharmacy. Despite competition between companies, despite a commoditization of the core hip and knee implant product line, and despite a near-doubling of procedure volumes, prices are 60 percent higher today than they were in 2000.
Why have prices stayed high?
The industry points out that they have to pay for R&D and regulatory approvals for their products and so higher prices are necessary to support these ever-increasing expenses. Pharma companies spend about 20 percent of revenues on R&D. Hip and knee companies spend 6 percent. Every drug that pharma companies develop goes through lengthy development processes and regulatory approvals that cost hundreds of millions of dollars. Orthopedic companies get almost all of their products approved through the 510(k) process, a regulatory pathway that takes six months and costs an order of magnitude less than drug approvals. When new drugs eventually lose patent protection and go generic, prices to the consumer decrease by 90 percent or more.
A second argument is that orthopedic companies need sales reps to service their product. This service comes with a major price tag. The average orthopedic company spends about $37 for every $100 they make on sales and marketing — by far their single biggest expense.
The surgeon plays a pivotal role in the orthopedic implant cost equation. Relationships between surgeons and sales reps make hospital price negotiations difficult. By taking the sales rep out of the operating room, implant companies would be in a more leverage able position to drive down prices.
Orthopedic surgeons face a stark choice. They can become part of the process and help hospitals decrease implant pricing, or they can chose the status quo.
So how do we achieve these cost savings?
First, there has to be a company that is willing to transform itself into this new model. How can they do this? First, they have utilized stable technologies that have far exhausted their intellectual mark-up. Rather than continue to demand traditional pricing, they are creating an efficient model and transferring the savings to the consumer. Second, they are removing the sales rep and all of their inherent costs from the model. When the sales rep is removed from the operating room, the surgeon and OR can make decisions based upon quality and cost, just like all other industries.
If a hospital or surgery center wishes to achieve these cost savings, they too have to become part of this process. They must be willing to say goodbye to the sales reps. This requires the operating room staff to do the tasks that they long ago gave away to the implant companies. The operating room staff will have to change their processes to manage the inventory and instruments for these procedures. They will have to become owners of the process and implants. We know that hospitals are capable of this change. Most hospitals own their small fragment fracture systems. They don't call the trauma rep to every case. This similar process can be applied to all other stable technologies when the hospital and surgery center wants to or needs to achieve real cost savings. We believe that time is now.
American innovation in medical devices has resulted in significant advances and improvement in outcomes. We agree that new technologies should be appropriately compensated. But, the continued inflation of pricing on devices that have exhausted their intellectual mark-up limits access to these technologies for the masses.
Dr. Rhode started RoG Sports Medicine in 2010 to provide value based orthopedic implants to the orthopedic community. He can be reached at blairbones@hotmail.com.
Related Articles on the Orthopedic Device Industry:
Successes and Failures: 18 Orthopedic and Spine Device Companies Battling a Tough Market
FDA Fields Over 5,000 Complaints for Metal-on-Metal hip Replacements Since January
U.S. Small Bone and Joint Market Hits $1B in 2010, More Growth Expected
When a person goes to buy a new LCD television monitor, their biggest concern is that tomorrow there will be a larger and cheaper version available. This is the value of free market innovation. When this business model has been applied to the areas of medicine where it's allowed, similar results have been achieved. When LASIK eye surgery first became available, the procedure cost in excess of $4,000 per eye. Today, ADs promote $269 LASIK procedures. On top of that, the results have improved with new technological innovation. This is also witnessed in plastic surgery, walk-in medical clinics and mail order pharmacy. Despite competition between companies, despite a commoditization of the core hip and knee implant product line, and despite a near-doubling of procedure volumes, prices are 60 percent higher today than they were in 2000.
Why have prices stayed high?
The industry points out that they have to pay for R&D and regulatory approvals for their products and so higher prices are necessary to support these ever-increasing expenses. Pharma companies spend about 20 percent of revenues on R&D. Hip and knee companies spend 6 percent. Every drug that pharma companies develop goes through lengthy development processes and regulatory approvals that cost hundreds of millions of dollars. Orthopedic companies get almost all of their products approved through the 510(k) process, a regulatory pathway that takes six months and costs an order of magnitude less than drug approvals. When new drugs eventually lose patent protection and go generic, prices to the consumer decrease by 90 percent or more.
A second argument is that orthopedic companies need sales reps to service their product. This service comes with a major price tag. The average orthopedic company spends about $37 for every $100 they make on sales and marketing — by far their single biggest expense.
The surgeon plays a pivotal role in the orthopedic implant cost equation. Relationships between surgeons and sales reps make hospital price negotiations difficult. By taking the sales rep out of the operating room, implant companies would be in a more leverage able position to drive down prices.
Orthopedic surgeons face a stark choice. They can become part of the process and help hospitals decrease implant pricing, or they can chose the status quo.
So how do we achieve these cost savings?
First, there has to be a company that is willing to transform itself into this new model. How can they do this? First, they have utilized stable technologies that have far exhausted their intellectual mark-up. Rather than continue to demand traditional pricing, they are creating an efficient model and transferring the savings to the consumer. Second, they are removing the sales rep and all of their inherent costs from the model. When the sales rep is removed from the operating room, the surgeon and OR can make decisions based upon quality and cost, just like all other industries.
If a hospital or surgery center wishes to achieve these cost savings, they too have to become part of this process. They must be willing to say goodbye to the sales reps. This requires the operating room staff to do the tasks that they long ago gave away to the implant companies. The operating room staff will have to change their processes to manage the inventory and instruments for these procedures. They will have to become owners of the process and implants. We know that hospitals are capable of this change. Most hospitals own their small fragment fracture systems. They don't call the trauma rep to every case. This similar process can be applied to all other stable technologies when the hospital and surgery center wants to or needs to achieve real cost savings. We believe that time is now.
American innovation in medical devices has resulted in significant advances and improvement in outcomes. We agree that new technologies should be appropriately compensated. But, the continued inflation of pricing on devices that have exhausted their intellectual mark-up limits access to these technologies for the masses.
Dr. Rhode started RoG Sports Medicine in 2010 to provide value based orthopedic implants to the orthopedic community. He can be reached at blairbones@hotmail.com.
Related Articles on the Orthopedic Device Industry:
Successes and Failures: 18 Orthopedic and Spine Device Companies Battling a Tough Market
FDA Fields Over 5,000 Complaints for Metal-on-Metal hip Replacements Since January
U.S. Small Bone and Joint Market Hits $1B in 2010, More Growth Expected