Implant Pricing: Not Black and White (EDITORIAL)
BY JOHN MCCORMICK, OCTOBER 21, 2005
Is Wall Street's shrill reaction to hip and knee implant pricing concerns overblown? Even with sophisticated econometric tools such a question is difficult to evaluate because we are dealing with an expectations driven phenomenon. So we have our doubts about the extent to which money managers have been able to do some real quantitative homework on implant pricing. We are therefore beginning to wonder if the markets have been relying on some borrowed intuition that needs to be questioned. That being said, we'd like to offer some borrowed empiricism.
We recently read some primary research from Bruce Nudell and Charlton Byun, MD, professional analysts with Sanford C. Bernstein & Co., LLC who have been doing a deep dive on the question of implant pricing with (i) sound intuition and (ii) some serious empirical work. A much deeper dive than the Chicken Little approach of Melissa Davis at thestreet.com in our view.
Nudell and Byun assert that the implant pricing process is much more complex than the reductionist model of hospitals vs. implant manufacturers. In fact, we live in a three dimensional world and physicians could well have some real power in the real pricing process. Nudell and Byun's approach is to rank surgeon population groups by procedure volume and test for concentration. Lo and behold, state level data is suggesting that the top 20% of physicians control over 70% of the hip and knee case volume. While they admit much work needs to be done to extend their analysis, Nudell and Byun assert "if the hospitals are to be effective in taming supply cost inflation, they must secure the cooperation of these high volume physicians."
A very important intuitive insight backed by some hard initial data and microeconomic savvy. While this doesn't exactly prevent Nudell and Byun from modeling decreases in ASP growth, they certainly aren't predicting catastrophe or even negative price growth either. From our own standpoint, the thrust of future orthopedic industry growth doesn't come from price inflation and that doesn't worry us one iota. We invite people to consider implant volume growth which Wall Street seems to be forgetting. It's all about increasing demand from patients who need surgical implants to improve their lives and not about manufacturers' ability to gouge hospitals.
