Generics are Coming! Generics are Coming! (written by Dr. Blair Rhode for ORTHOPRENEUR Nov 2011)
Blair Rhode, M.D. is a sports medicine orthopaedic surgeon who saw an opportunity and a need for generic-based implants. He started RoG Sports Medicine (www.buyrog.com) in 2010 as an EcoOrtho® company.
Dr. Rhodes 4-part article:
- Why Implant Costs have Stayed High
- Generics—It’s About Process
- The First Step
- In Summary
Why Implant Costs have Stayed High
The orthopaedic industry has done an excellent job of creating a dependence upon sales reps and what they offer. The sales rep has allowed the hospital and surgery center to “dumb down” the OR staff, because a laser pointer awaits the next instrument needed in the case. They also fostered instrument and implant consignment, allowing the OR to get out from under these costs. But this didn’t come without a cost of its own.
The U.S. orthopaedic implant industry is a $20 to $25 billion business (author estimate), and amazingly, almost 75% of these time-tested (stable) technologies have expiring patents. This typically means it is no longer necessary to continue to pay a premium for these products. In most other industries, as technologies become stable, they become a value proposition and thus, price declines over time. My biggest fear in buying an iPhone is that a better (and cheaper) one is going to be released next month. There are a few areas in medicine in which this free market concept has flourished. Lasik eye surgery used to cost $4,000 per eye. Now you can get the procedure done for $269, with better equipment.
Only a handful of incumbent suppliers control 90% of the market, and they defend their pricing by stating that they have to pay for R&D and regulatory approvals for their products. Pharmaceutical companies spend about 20% of revenues on R&D. Orthopaedic companies spend 6%. Pharmaceuticals require a lengthy development processes and regulatory approvals that cost hundreds of millions of dollars. Most orthopaedic implants, in contrast, receive FDA clearance through the 510(k) process, a regulatory pathway that takes only six to nine 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% or more. It is now possible to benefit from the same market forces when purchasing orthopaedic implants, and we predict that alternative suppliers will soon be abundant.
The final but most sensitive impact of generics will be the realignment of the sales reps’ responsibilities. Sale reps carry a hefty price tag for the orthopaedic companies. These services can account for as much as $37 for every $100 spent, and are by far their greatest expense. Choosing to take back control of your orthopaedic service and manage this responsibility internally will be no small commitment, but is clearly the single most strategic decision you can make to lower your implant costs.
Generics—It’s About Process
When someone hears generic, he thinks “cheap.” Or Chinese factory, inconsistency and poor quality. Generic is actually about efficiencies and process. The irony is that the orthopaedic cartel wants you to believe that the cost is in the intellectual property and manufacturing. We already discussed that 75% of orthopaedic implants used today are stable technologies. Innovative ideas should be rewarded. And they are. That is why drugs and devices are given patent protection for several years. Once the patent protection has expired, they should become value propositions as competitive market forces drive prices down. The manufacturing costs are a small component of the final price tag of an implant. The average cost of goods for a primary total knee implant is approximately $300 to $500. While the cartel is establishing offshore manufacturing in Asia, our company, RoG Sports Medicine, manufactures FDA-cleared shoulder anchors in the U.S. and the instruments are made in Germany.
In order to gain the cost advantage of stable technologies, the OR and surgeons must become part of the process. First and foremost is to say goodbye to the sales rep. This requires the OR staff and central supply to take on the responsibilities that they long ago gave away to the implant companies. The OR staff will have to change their behavior and take back the responsibility to manage the inventory and instruments for these procedures. They need to behave like owners, and we know that hospitals are capable. Most hospitals own their small fragment fracture systems and they don’t need to call the trauma rep to every case. A similar process can be applied to all other stable technologies when the hospital and surgery center decide to take back control. This is also quite normal behavior for most ORs around the world. Now it’s our turn to learn how to do more with less.
Shoulder anchors and instruments provide the ideal starting place. Like small frag sets, most OR personnel are very comfortable with these procedures, and reps are seldom present. However, other procedures and devices will require a greater level of training and support.
This is why the field of Operating Room Device Technicians (ORDT) has garnered growing attention. A company called OrthoDirectUSA has developed a program and certification process to assist ORs in obtaining qualified ORDTs. Think of the ORDT as an onsite specialist (your employee), who is qualified to teach and manage all orthopaedic procedures that utilize stable implants. OrthoDirectUSA assigns an onsite coach to mentors these ORDTs while they are learning their new responsibilities. These mentors are former reps who can leverage their skills, experience and relationships and help hospitals improve their profitability. They have a vested interest in the success of generic implants. So much so, that their jobs depend upon it. If the hospital or surgery center reverts back to the traditional model, they lose their job.
The First Step
You absolutely must define a clear structure that will align and reward surgeon compliance; if you do not accomplish this step, don’t start. Once this is in place, it is time to qualify the right generic supplier. A quality generic supplier can offer significantly lower prices for stable technologies. They accomplish this by removing all unnecessary costs and passing those savings on to the buyer. They have no sales force; the product is purchased via a web-based portal and there is no consignment. The company has elected to take smaller margins and targets value-based buyers. These are knowledgeable, informed buyers. These are buyers who understand value.
On the “distribution” side, studies have shown that the mere presence of a rep in the OR increases implant usage by as much as 30%.The typical rep model is to push more products into the OR. They are motivated to “sell you more, for more.” The generic distribution is motivated to help you “buy more for less”…quite a difference.
This is just free market entrepreneurship, nothing more, and nothing less.
The industry will propagandize and say that the product is inferior. The outcomes will worsen due to no rep being present. I feel that orthopaedic surgeons can perform excellent shoulder surgery without a laser pointer at their back table. After all, these stable technology designs have been functionally the same for years.
In Summary
By 2015, there are some estimates that 40% of orthopaedic surgeons will be selling out to hospitals; a bankrupt Medicare system will force a change in delivery incentives, such as team-based care (partnerships with primary care physicians, specialists, non-physicians and hospitals). Quality outcomes and efficiencies will be rewarded. Performance will matter — for everyone.
The fact is, as reimbursements decline, ASCs and acute care facilities will have real difficulty trying to survive paying the current mark-up for stable technology implants. These products are quality, “time tested” technologies that have exhausted their patient value. As soon as surgeons understand that they can have the same quality to which they are accustomed, the transition to generics will accelerate. Then hospitals and ASCs can once again become owners of the implants, the instruments and the process that allows these savings. When this happens, we can begin to save medicine.
Blair Rhode, M.D. is a sports medicine orthopaedic surgeon who saw an opportunity and a need for generic-based implants. He started RoG Sports Medicine (www.buyrog.com) in 2010 as an EcoOrtho® company. Its goal is to provide ecological and economical solutions to the orthopaedic community. Dr. Rhode can be reached at [email protected].