OTW recently hosted a debate about the legality and ethics of physician-owned distributorships (PODs) and whether such ownership resulted in unnecessary surgeries.
We ended Part I of this debate with a question about the larger economic issue of who wins and loses under the current models of physician-owned distributorships. This week we bring together John Steinmann, M.D., founder of the first POD and Pat Miles, President, Global Products and Services of NuVasive, Inc.
Pat Miles and JohnSteinmann, M.D.
Short-Term Gain at the Price of Innovation?
Dr. Steinmann argues that physician ownership saves the healthcare system money and makes winners of patients, payers and society. Mr. Miles argues that such ownership only brings short-term financial benefits while long-term investments in innovation—which drives long-term savings—suffer.
Also joining this debate are OTW readers—whose comments are part of this story too.
Economic Impact of PODs
The financial and economic impact of PODS cannot be ignored. CEOs of device manufacturers frequently talk about PODs on their quarterly calls with analysts. Globus, Inc. a spine company in the midst of a public stock offering notes PODs as a risk to their business in the offering document. “The proliferation of physician-owned distributorships could result in increased pricing pressure on our products or harm our ability to sell our products to physicians who own or are affiliated with those distributorships.”
Wells Fargo Analyst Larry Biegelsen has reported that PODs have captured about 10% of the U.S. spine hardware market or roughly $500 million in sales.
Readers Respond
After the last debate, Ron Clark, M.D., an orthopedic surgeon from South Bend, Indiana commented:
There is an “elephant in the room” here… What does the growth in popularity of PODs tell us about the function of the industry’s independent distributor? Is the value proposition for medical products distribution changing and is the distribution business model changing with it? Or is the independent distributor stubbornly holding onto an outdated model and refusing to change with the times?
Another reader added that the debate seems to have over looked a major reason that PODs are good for patients—the loss of the 30% commission paid by most companies to their distributorship. POD owners are users and trained professionals and do their own due diligence.
“The POD model allows the owners to select, train, supervise, and manage their representatives in a much more cost effective fashion. The POD orthopedic implant is sold to the hospital at a lower end user cost than the ‘traditional’ distributor model. The DOJ [Department of Justice] is not blind to this reality which is why the model has not been shut down, ” wrote the reader.
Do PODs Promote Cost Savings?
Dr. Steinmann: Physician-owned distributorships, formed with proper intent, and operated consistent with the standards of the American Association of Surgeon Distributors (AASD) absolutely promotes cost savings.
Our current system lacks effective market forces to create competitive pricing of orthopedic medical devices. Competition is based on relationships not value, negotiation is ineffective, products are purchased one at a time, device companies are at risk for large amounts of inventory, and distributors/product reps add costs disproportionate to their value.
The surgeon-owned distribution model has the necessary components to produce sustainable cost savings. Competition is based on value, negotiation is effective, product is purchased in volume, device companies are relieved of significant inventory risk and product reps are paid consistent with similar healthcare professionals.
A recent study of five distributorships operational for over one year, affiliated with Alliance Surgical Distributors, demonstrated an average 37% reduction in costs compared to non-surgeon owned distributorships.
Mr. Miles: In the short term, there is the potential for finite savings, depending upon the pricing scheme employed.
However, physician-owned distributorships typically supply only conventional products without the capacity or incentive to invest in innovation which drives more substantial healthcare system savings in the long term and delivers enhanced patient benefits.
The question is whether we are willing to forgo innovation to recoup the short-term price differential in plates and screws. Spine surgery is constantly evolving; the suggestion that we are at a point where all service and procedures are the same is false.
Making surgery more predictable with better patient outcomes, less revision, and less rate of infection will have a much more substantive cost savings to the healthcare system. Innovation is only brought about by market forces reflective of an incentive. In the short term, mitigation of market forces results in opportunism; in the long term, higher cost.”
Dr. Steinmann: Mr. Miles assertions reflect widespread misconceptions.
First, “conventional products” are generally our best and safest products.
Second, profitability is a result of innovation, not visa versa.
To suggest that obscene profit margins are necessary to ensure innovation is frankly untrue.
It should also be pointed out that the device industry spends less than 5% of revenue on R&D while spending nearly 35% on sales, marketing and promotion.
Third, while product innovation sometimes leads to improved outcomes, it rarely, if ever, has led to lower healthcare costs.
Lastly, Mr. Miles seems to have the market force/opportunism issue backwards. Market forces exist when there is a knowledgeable customer to value the product, such as is found in the surgeon-owned distribution model. Opportunism is more clearly displayed by a company convincing a surgeon to choose their product, and then charging an obscene price because they know they have the sale.
Mr. Miles: POD’s do not enhance market forces but rather introduce more conflicted interest.
Where POD affiliated surgeons deliver care and simultaneously control the delivery and pricing of goods, any savings would be short lived as the competitive market forces disappear. Cost savings becomes reliant upon the goodness of the provider; not market forces.
This scenario would create an environment that lacks incentive to create value.
Winners and Losers
OTW: Mr. Miles and Dr. Steinmann, who wins and loses when PODs are in the marketplace?
Mr. Miles: Nobody wins in the medium or long term via PODs. The healthcare system and its patient customers would lose over the longer term as innovation is replaced with minor pricing opportunism. The incentive that created minimally invasive spine procedures like XLIF is lost without the market forces to encourage innovation and make surgery better. Market forces drive value creation in immature markets and commoditization in mature markets.
In NuVasive’s view, spine is NOT a mature market. We have demonstrated value through XLIF by combining service with pioneering technology to reflect better surgery for the consumer.
These same market forces must be fostered to continue the encouragement of surgical options that deliver enhanced patient benefits at reduced cost.
Dr. Steinmann: Patients, society and the U.S. healthcare system—win. Highly compensated distributors and monopoly dependent companies—lose.
Our healthcare system is twice as expensive as it should be, placing an unreasonable burden on society. Access to healthcare is threatened, individuals are bankrupted and American businesses are forced to compete globally with companies operating with far less healthcare costs.
Physicians have largely neglected the costs of the care they provide but this must change. Physicians are the most suitable group to develop a focus on value and have a responsibility to challenge cost and ensure the quality and access for their patients.
The surgeon-owned distribution model provides a mechanism for surgeons to create sustainable healthcare savings through competition, efficiency and meaningful alignment of all stakeholders.
Mr. Miles: Markets and competition are frustrated and undermined when PODs control the setting of price. This is because the incentive to compete for business and demonstrate value through better patient outcomes is taken away.
Our customers continue to derive value out of a well-trained sales force that can influence the delivery of care. They further derive value from the technological innovation we bring to surgical care, innovation that is demanded by the experienced purchasing decisions made by hospitals and surgeons who demand better surgical solutions for the benefit of patients at reduced cost.
We agree that market forces are the answer but don’t believe the cynical view that furthering conflict thru short term minimal price differentials via PODs impacts value anywhere close to the way spine care is influenced by innovation.
Dr. Steinmann: Mr. Miles suggests that fair pricing and effective competition will eliminate innovation. To reiterate, there is no historical basis for the suggestion that innovation requires price protection.
The majority of implants used in orthopedics and spine, including most of Mr. Miles products have long ago reached a commodity status. It is time that we instill effective market forces to bring these products to society at fair prices.
Surgeons are, without doubt, the most suitable individuals to value products, value innovations and to distribute product in the most cost effective manner.
The U.S. healthcare system clearly wins with properly structured surgeon-owned distribution companies.
OTW: Thank you for your time and spirited conversation gentlemen.
While the debate continues, the Department of Health and Human Services’ Office of Inspector General is preparing a report for the U.S. Senate to assess the adequacy of the guidance that has been issued addressing the legality of PODs and other physician-owned entities under the Federal Anti-Kickback Statute. The report is expected this summer.
