GENERIC DEVICES – IT’S ABOUT DISTRIBUTION (Orthopedics This Week)
Generic orthopedic devices can replace 80% of implants sold by conventional vendors, says Stephen Lichtenthal, vice president of business development for The Orthopaedic Implant Company.
Designs and improvements in technology have plateaued in orthopedics. This mature market is ready for the final cycle of economics, says Lichtenthal.
He argues that removing the “omnipresent” sales rep from the operating room, combined with low R&D costs creates the opportunity to generate cost savings for hospitals. It’s not about manufacturing, says Lichtenthal, but about the logistics of distribution and managing inventory.
Because the devices are less differentiated from each other, hospitals can go back to managing their own inventory. Conventional manufacturers disagree of course, but no one doubts distribution models are changing in response to new reimbursement models like bundling.
Lichtenthal makes his case. Let us know what you think.
Walter Eisner – Senior Writer, Orthopedics This Week
The idea of generic orthopedic medical devices pertains more to a supply chain model rather than copying designs of existing devices.
Furthermore, truly generic implants (defined as being an identical copy of an existing implant) and proprietary, high-value implants provide similar discounts through the modified supply chain model. The term “generic” in the context of orthopedic implants has come to mean change in the philosophy of implant management and the augmentation of the supply chain model currently in place.
“Omnipresent” Sales Rep
Almost entirely exclusive to orthopedic implants, the sales rep has become omnipresent in our hospital systems’ supply chains and logistics across the country. This includes reordering materials, re-stocking implant and instrument trays, managing inventory, regularly attending cases in the OR, bringing used sets to the sterilization department and getting them ready for the next case.
Depending on the facility, the entire management for these devices can be out-sourced to the sales rep.
Rep-less Sales and Low R&D
Referred to as “Direct-to-Facility,” “Rep-replacement,” or “Rep-less,” a change in today’s distribution model removes local sales representation from the supply chain.
Removing local sales representation in conjunction with low R&D [research and development] costs creates the savings generic implants generate.
Twenty years ago, a sales rep might have attended a few cases when their company released something truly innovative. Today, they attend the OR religiously, assisting with the painfully mundane, struck with fear that if they are not present, another vendor will swoop in.
Furthermore, proprietary design does not necessarily mean higher cost. R&D only makes up 4.5% to 5% of spend for any vendor in this space. Conventional vendors have already recouped R&D cost several times over on a given implant’s design that is, in some cases, decades old. This also speaks to how commoditized these implants are and raises the question as to why they carry hefty price tags.
Designs and improvements in technology have plateaued in orthopedics. This mature market is ready for the final cycle of economics in which value is the end game, thus making generics an exciting and timely opportunity for facilities and doctors poised to take advantage of a leaner supply chain.
Hospital Managed Inventory: Back to the Future
When “going direct,” the hospital has come full circle, returning to a time when they managed their own inventory, case in and case out. The manufacturer receives orders from the hospital, not the sales rep, and sends it out. Upon receipt, a hospital employee re-stocks and accounts for inventory. In doing so, savings realistically equate to 40% to 60% when compared to rep-dependent vendors’ pricing. Crucial to successful implementation of generic orthopedic implants is managing inventory.
Starting in the late 90s, hospitals grew tired of buying sets and corresponding inventory because doctors were continuously being sold on the latest and greatest from the industry, requiring the purchase of sets and inventory over and over again. A line was drawn and the policy of “consignment only” was largely adopted.
Sadly, this has painted hospitals further into the corner that has helped pricing stay falsely high. Without paying for sets up front, the cost of replenishing implant trays, in part, has gone up dramatically. If a restaurant with 60 tables keeps ketchup at each table, they are not re-ordering one at a time as needed. The restaurant keeps several cases in the back because the pricing is better when buying in bulk, and operationally, a table is sure to be missing ketchup if they relied on the sales guy to bring the bottle “just in time”.
More impressive than the percentage points are the actual dollars saved. Generic implants are seeing adoption in all major areas of orthopedics—trauma (hardware for internal fracture fixation), total joint reconstruction, spinal correction/fusion and sports medicine. The savings range from a few hundred dollars a case to several thousand dollars a case.
Bundling Drives Value
Incentivizing the surgeon to find better value is the lynchpin to driving prices down.
While in their infancy, true bundled payment programs are proving to be fruitful for provider, facility and most importantly, patients, in the pursuit of better value. These bundled payment programs reimburse facility and surgeon with one, predetermined payment. The result is that physician and facility are aligned and driven to find the best value for the best delivery of care.
A separate reimbursement for facility and surgeon is a large impediment to lower healthcare costs. The movement is considered to be one where healthcare migrates from “fee-for-service” to “pay-for-performance.” Under fee-for-service, incentives are all volume driven and do not reward value. Pay-for-performance awards best practices and highest value. Admittedly, the transition is a glacial process with programs still being tested and data proving validity are distant.
So why are doctors adopting the use of generic implants if their reimbursement is not increasing? More appropriately, which doctors are championing this effort?
The incentives are not in their reimbursement per se, but rather the quality of medicine they practice. Large, academic hospitals are proving to be the most progressive in moving to generic devices.
While methodologies vary, large, academic hospitals provide service-line reinvestment when doctors create better value. Whether it’s for research, expanding the fellowship program, or adding supporting clinical staff, all of these things add up to doctors being able to practice better medicine and further its science.
Rewarding the Adapters
Another crucial attribute these hospitals share is that case volume has forced hospital staff to manage many of the screw and plate sets for fracture fixation without a sales rep. So, they have been paying premium prices for their implants without getting the premium service touted by company representation.
Ironically, a lack of case volume has led many facilities situated in sparsely populated regions to manage their own hardware as well. For sales reps with wide territories that include rural areas, they spend as little time as possible in these facilities. The volume just doesn’t justify their driving hours each way to cover a case. Just like academic facilities, small rural hospitals handling any kind of orthopedic trauma are doing things on their own because they have to.
Both of these types of facilities have evolved to be self-sustaining out of necessity and now their logistical competency can be rewarded.
Spine and Total Joint Reps Add Value
Realistically, generics can comfortably replace 80% of implants sold by conventional vendors. More accurately, 20% of cases see a real value-add in having the sales rep attend cases in the OR. Minimally invasive spine surgeries and total joint revision cases are examples of this. With multiple trays of instrumentation and complex techniques, a sales rep can help support a case by being able to provide guidance should something not go according to plan during the case.
Evolving and Adapting
The evolution of the orthopedic implant industry over the last 30 years is a remarkable one. U.S. healthcare’s “fee-for-service” has allowed price increases across the board to run rampant. Implant designs are decades old. Differentiation among the crowded field of vendors is minimal in the most exaggerated comparisons. Yet, the price of implants has gone up an average of 8% a year. It is a new world. The spotlight is on savings in healthcare and today’s supply chain in orthopedics sorely lacks the fundamental approach to being part of the solution we need to save our country’s healthcare system.
Just like generic pharmaceuticals, generic implants can bring billions in savings annually and are the next logical step in our urgent pursuit of value and accountability in healthcare.