Orthopedic Agonistes
BY EDITOR, SEPTEMBER 29, 2003
Orthopedics, the self-made industry, is troubled and struggling. At least that was the tone at last week's OrthoKnow Symposium (one of the best of such industry gatherings) as distributors and their fellow travelers gathered to discuss the state of orthopedics. What's wrong? Too much revenue and earnings at the manufacturing level, for one thing. Too much attention from the Department of Justice, for another. And too little physician and hospital reimbursement - for sure. Indeed, these are troubling times. These are the days of Orthopedics Agonistes.
Issue #1: The Gap Between Ortho Manufacturer Performance and Hospital/Physician performance: As we've documented repeatedly on these pages, the business of supplying orthopedic products is, perhaps, the most lucrative sector in medical devices now. It is certainly the largest medical device sector at $17 billion in annual revenues and with public company sales rising 18% for the first half of this year, the fastest growing. Frankly, demand for orthopedic products has never been higher. Some interesting facts that came out of last week's symposium:
- A woman's risk of hip fracture is greater than the risk of breast, uterine or ovarian cancer – combined.
- The worldwide number of fractures is roughly equivalent to each person having two fractures at some point in their lifetime.
- To quote one commentator, “the attack of the chubbies” is an orthopedic industry windfall. Weight gain seems to be an unstoppable trend – not only in the U.S., but Europe and Japan as well, and that only increases demand for orthopedic therapies.
But, while orthopedic implant suppliers are reporting record sales and earnings, hospitals and physicians are watching reimbursement rates slip even as the flush manufacturers put through record list price increases. The gap between the haves (ortho suppliers) and the have-nots (hospitals and physicians) is growing. This leads to Issue #2.
Issue #2: Can physicians and hospitals participate in the orthopedic industry's success? Or put another way... can manufacturers share their financial success with the hospitals and surgeons who buy their products? The answer is changing and that was probably the largest and most complex issue tackled at last week's conference.
From the hospital side, business development programs that encourage, license and promote the intellectual property developed by their professional staffs – surgeons, clinicians and scientists – are increasingly expected to add to the institution's financial future. To realize financial benefit hospitals must partner with the manufacturing sector.
Then there is the relationship between orthopedic surgeons and manufacturers. One speaker at the conference related a story, perhaps hypothetical perhaps not, of a surgeon whose income from honorariums exceeded his income from treating patients and that the disparity led to that physician's over-use of expensive implants which were manufactured by the company providing his alternative income.
Then there's the Medtronic regulatory filing earlier this month which disclosed that the U.S. Department of Justice was investigating allegations that Medtronic's Sofamor Danek division had made illegal payments to doctors in violation of federal anti-kickback laws. The investigation came under the qui tam provisions of the False Claims Act which is designed to encourage private individuals who are aware of fraud being perpetrated against the government to bring such information forward. This is also known as the “whistle-blower” provision.
The medical device industry has been relatively immune to these types of allegations. Not so the pharmaceutical industry. In all these cases, what the Justice Department is looking for is evidence of a “kickback,” a rebate violation, an average wholesale price (“AWP”) violation or other fraudulent schemes. All of which they found in the pharmaceutical industry.
Two recent, high-profile pharma company cases highlight the issues now entering the medical device industry. A former vice president for sales with TAP Pharmaceutical Products ("TAP"), and a physician, exposed a pharmaceutical kickback scheme, which was ultimately settled for $875 million ($290 million in criminal fines and $585 million in civil damages and penalties). This was the largest healthcare fraud case in American history. The two owners of TAP, Abbott Laboratories' and Takeda Chemicals of Japan, pled guilty to a criminal charge of conspiring with doctors to over bill government insurers for Lupron.
The whistleblower doctor in this case exposed a salesperson's attempt to bribe him to put Lupron back on his Medicare HMO's formulary. As a result of this whistleblower's actions Medicare was able to recover almost a billion dollars. The doctor and the former V.P. netted about $95 million.
The second case involved the Bayer Corporation, which agreed to pay $14 million to the federal government and 45 states to settle a qui tam lawsuit in early 2001. Here again the allegations were that Bayer engaged in AWP manipulation practices that caused physicians and other healthcare providers to submit inflated reimbursement claims to Medicaid. The whistleblowers in this case received a $1.5 million share of the recovery.
Here's the bottom line: Federal law prohibits kickbacks. They are thought to “color” the judgment of the physician. They are thought to prompt the physician to order tests, implant devices or prescribe drugs that are not based on what is best for the patient or is economical for the program, but on what increases the physician's bottom line.
What's a kickback? Payments for participating in a clinical trial? Speaker fees paid for by honorariums? Grants? Preceptorships? Investigator meetings? Advisory board meetings?
Not likely, we think.
But, physician income is under pressure from a twin whammy of flat reimbursement rates and skyrocketing insurance premiums. Hospital income is under pressure from rising labor, pharmaceutical and equipment costs and declining reimbursement. Increasingly, both physicians and hospitals are deriving a significant portion of their income from the manufacturer through a variety of partnership opportunities. What is the quid pro quo?
How vulnerable are the likes of Medtronic, JNJ, Stryker, Zimmer, Smith & Nephew – indeed the entire medical device industry to a critical investigation of these relationships? That is troublingly unclear.
