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Voice of Industry

Trends in Design and Delivery Call for Greater Conversation

Six months into the implementation of the Affordable Care Act, the number of patients seeking orthopaedic intervention has not drastically changed. However, an increase in insured patients and an aging population are expected to affect procedure volume in coming years. Orthopaedic device companies that can demonstrate innovation in design and delivery, as well as efficiency in use and cost, will be best-positioned to succeed.
 
Keynotes at OMTEC® 2014, the 10th Annual Orthopaedic Manufacturing & Technology Exposition and Conference, looked at current challenges facing device companies and suggested ways to adapt to the changing marketplace. This year’s keynote participants included:
 
Dirk Kuyper, President and CEO of IlluminOss Medical, a fracture repair company selling in the European market with plans to expand to the U.S. Mr. Kuyper previously served as President and CEO of Alphatec Spine.
 
Michael Butler, President and CEO of Life Spine, which markets 32 product families in 22 countries. Life Spine is his fourth medical startup.
 
Robert S. Bray, Jr., M.D., CEO and Founding Director of DISC Sports & Spine, a 40-physician outpatient clinic. He is also Co-Founder and Inventor at RSB Spine.
 
Overarching themes arose from the two sessions: delivery models, design and use of instruments and the convergence of innovation and price pressure.
 
Trends in Direct Sales
Scrutiny of the sales rep’s role in the OR continues in the U.S. and Europe as device companies and their customers seek to cut costs. This has allowed for low-cost (generic) device companies and direct sales models to grow within the orthopaedic market. Whether these companies and models will gain traction is yet to be seen, though presenters indicated that there is room in the marketplace for change.
 
Speaking specifically of low-cost manufacturers, Butler noted that while Life Spine hasn’t experienced competition from them, there could be a market to some degree. Overall, though, the savings is not great enough to supplant the value and tradition of having the rep in surgery, he said, observing that the hospitals on his radar that went without reps have returned to the former distribution and rep model, having realized the importance of the service component.
 
“It’s an extremely valuable service, and I think it’s talked about in a deleterious way too much,” Butler remarked. “That service element is the whole component behind orthopaedics that supports the foothold we claim inside the market.” 
 
Kuyper agreed in terms of the importance of service and distribution—managing inventory is a challenge for hospitals. However, he stressed that as accountable care organizations (ACOs), bundled payments and creative pricing structures grow, evolution will likely occur in the direct sales model. Device companies need to consider how they can benefit from that environment.
 
Alternative pricing has become attractive to hospitals and ASCs. The Center for Medicare and Medicaid Services (CMS) recently opened a second cohort for its bundled payments initiative. More than 80 percent of the bundled payment providers in the first cohort are focused on total joint replacement. Also, orthopaedic ASCs that have grown tired of low reimbursement and recognized the increase in patients willing to pay without insurance have added bundled, cash-only pricing as a payment option.
 
“It’s not just happening in the U.S.; it’s happening in Europe too, where they’re creating a single payment for the entire episode of care,” Kuyper said. “I think that’s going to drive ACOs toward more direct purchases. The more they can control the cost of individual components and delivery of care, the higher their profit margin. As an industry, we need to stay on top of and understand how that’s going to change.”
 
Based on his experience, Bray noted that the distribution chain will move to direct sales and purchasing groups will continue to gain popularity, though not overnight. His 40-physician ASC, which will soon have five operating rooms, plans to purchase under group providers.
 
“I believe there will be more direct sales from the company to the end user, whether that’s a hospital-managed or an ASC-managed chain,” Bray said. “We have a full time director of implants and supplies who purchases directly. Much of what we buy in advance—our biologics, our bone, our implants—are put on the shelf, and we don’t have a rep in the room when they’re used, in many cases. That is the way we’re going. If we can get a better price by doing that, then so be it.”
 
As surgeons and providers request simpler design, specifically in instruments direct sales will be fully recognized. “I don’t want you to show up with ten trays that I have to sterilize the night before,” said Bray. “As we get simplistic, it will go more direct. And I think as creative billing options are in place…we will see some significant changes.”
 
Trends in Instruments
Kuyper and Butler also touched on instruments from a manufacturing cost and quality standpoint. While the implant must function properly, the feel, look and quality of the instrument is critical to a surgeon’s perspective of the overall product, making it difficult for device companies to cut the large capital associated with instrument production. The question becomes, how do companies find that cost savings? 
 
Discussions turned toward offshore manufacturing and greater control of R&D.
 
“Manufacturing offshore with instrumentation is the viable next step,” Butler said, though companies need to be cautious of the quality and success of sending the manufacturing to low-cost countries. “We went as far as starting a company offshore and put people there whom we chose and managed. We built it ourselves.”
 
Kuyper said his previous experience of offshoring instrument production in low-cost countries didn’t work. The quality lacked, thus they returned to purchasing products from the U.S. and Germany. However, savings have been found, he added, in keeping sets lean.
 
“Ask ten surgeons; they will each give you 30 instruments that they have to have in the set, that they’ll actually never use,” Kuyper said. “It starts in terms of R&D, product development and marketing, working closely with the development team to make sure you’re only putting in the instruments you absolutely need. There may be some oddball instruments that you keep out, as a separate set. Right up front, you need to control the capital costs.”
 
As a surgeon and ASC CEO, Bray said that the aspects of inventory and sterilization surrounding sets will be areas in which companies like his seek cost savings. Ideal for him is having just a handful of routine instruments on his shelf, so that when the implant is delivered he only needs to find and purchase a prepackaged, sterile sizer. “Think of the efficiency, the flow, the cost—the overall cost to the patient,” he said.
 
Bray challenged manufacturers to design instruments not for quantity and possibility, but for ease of use and sterilization. A decrease in the number of instruments would require surgeon education on the new standard, but represents price-containing collaboration that must happen at the industry and training level.
 
Another reason that device companies must limit the number of instruments arises from the trend toward delivering multiple sets many days before a procedure. Bray referenced the U.S. Department of Veteran Affairs’ new program that requires two sets to be delivered three days prior to the procedure. A number of hospitals are following suit. DISC has moved to two days prior and plans to implement a two-set rule.
 
The reason for the change is CMS’s mandate that procedures must be done as booked or else be classified as a reportable offense. “I can’t afford to open that set and find out that the screwdriver is missing,” said Bray. “I can’t afford to have people up all night to sterilize trays. I have to have them there ahead of time, with duplicates, and as-recommended and as-approved by the insurance company. If I change one implant that was authorized from the day before, I don’t get paid anything; the entire case is denied.”
 
Device companies’ inventories will be directly impacted if this request becomes a greater trend.
 
Trends in Hospital and Payor Approval
Millions are invested in getting a product to market, but what good is the investment if hospitals refuse to purchase the technology, or payors refuse to cover its use? Scrutiny of cost and outcomes is not expected to decrease. The keynotes covered the meeting of innovation and price pressure, and barriers moving forward.
 
Pushback at the hospital level continues as product choices are made by committees, group purchasing organizations, etc., instead of surgeons. The decision makers seek to work with fewer device companies that can provide all-encompassing product lines, better pricing and products with recorded outcomes-data.
 
The cycle of selling an implant has gone from an hours-long process to three months or more, as purchasers complete value analyses on products, Butler said. Though faced with the previously-mentioned constraints, companies cannot stop innovating while addressing the requests of customers.
 
“Innovation has changed; there are few products that are leapfrog technologies where we have a paradigm shift in the way surgeons are operating,” Butler said, mentioning the cost and time that companies must invest just in regulatory clearance of novel technologies. “Innovation now comes through cost savings and operational efficiencies, because in surgery it’s difficult to prove efficacy at this point—that’s the level-one data that we’re missing."
 
The price pressure felt by medical device companies isn’t going away, so it’s critical that companies adapt, Kuyper said. As hospitals try to force out higher-priced products, companies need to build economic and outcomes data into the development timeline. As an example, he provided his own company, which is starting two IDEs in the U.S. and studies in Europe. IlluminOss has hired a consulting firm to assist in capturing the cost of episode of care, from the time the patient enters the hospital to the end of rehab, in order to show the full economic benefit.
 
“If you don’t demonstrate a significant improvement in outcomes or a significant reduction in costs, it doesn’t matter how cool the widget is; it’s not going to get paid for,” Kuyper said. “That’s just the reality of the situation. It’s critical to make sure that you think about [outcomes data] from day one and start building it into your pipeline.”
 
Pushback isn’t experienced only at the hospital level. Regulatory clearance no longer equates to payor approval, Bray affirmed. Payors are increasingly denying the use of products that aren’t associated with long-term data.
 
Bray stressed that surgeon and device companies must collaborate on the collection of data surrounding OR efficiency and device success, and that patients, hospitals or surgery centers can’t and won’t continue to eat the cost associated with new products—no matter how innovative. 
 
To solve the problem of payor denial, Bray challenged device companies to develop one voice that lobbies to define a path for approval. “[Device companies] need to tangle with the insurance companies on what is the definable pathway to approval so when they sell their device to someone, someone gets paid,” he said. “It’s going to become a shared-risk entity across the industry, and it’s going to be a fight.”
 
A video recording of Bray's keynote, which includes his thoughts on the future of PODs, biologics and robotics, can be found at OMTECexpo.com