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Price pressure will continue to drive the orthopaedic industry’s narrative in coming years as cost containment measures from public and private payors trickle through the healthcare supply chain. Opportunities will present themselves, though, to device companies that are able to innovate through products that improve outcomes or through processes that decrease costs.
This was the outlook provided by orthopaedic leaders of device companies, hospital systems and universities at OMTEC® 2015, the Orthopaedic Manufacturing & Technology Exposition and Conference.
“The reality is that as physicians and hospitals have to deal with a set of changing rules, manufacturers and industry also have to deal with that same set of changing rules,” said Wael Barsoum, M.D., President of Cleveland Clinic Florida and Vice Chairman of the hospital system’s Orthopaedic Department.
Specifically, Barsoum spoke of the U.S. movement from a volume-based, fee-for-service healthcare model to one that is value-based and outcomes-oriented. He showed the equation Value = Quality/Cost, explaining that either surgeons and hospitals are going to need to improve quality without raising cost, or will need to reduce the cost without compromising quality. If surgeons/hospitals fail to demonstrate that basic concept to the Centers for Medicare and Medicaid Services (CMS), then reimbursement is docked.
Hospitals’ pressure on device companies relative to price will remain, because this is only the beginning of the move to a value-based model. In 2014, about 20 percent of Medicare reimbursements were considered to be value-based. In January 2015, the U.S. Department of Health & Human Services announced its goal to link 90 percent of fee-for-service Medicare payments to value or quality by 2018. Though Medicare is driving this model, private payors are following suit.
During his Thursday keynote OMTEC address, Dr. Barsoum provided revealing numbers to show how reduced reimbursement and consumer-driven transparency are impacting hospital revenues and budgets.
The Cleveland Clinic reports 115 quality metrics for every Medicare patient. In 2005, the number of metrics was ten. This collection is mandated by Medicare, and that mandate takes time, effort and money, which means fewer resources to devote to devices.
The number of Medicare beneficiaries is expected to increase from 54 million in 2014 to 61 million in 2022, up 13 percent, per CMS. During that same time period, Medicare is expected to decrease payments by $419 billion in order to slow its growth rate, according to the Congressional Budget Office (CBO). (Medicare spending reached just under $500 billion in 2014 and is expected to surpass $800 billion by 2022, which is growth of about four percent. In the first decade of the 2000s, Medicare spending grew at a rate of about six percent, according to the CBO.)
The number of Americans on high deductible insurance plans has risen from 19 percent in 2009 to 36 percent in 2014, according to the Centers for Disease Control and Prevention. As those covered by private insurance are asked to pick up more of the bill, they’re seeking price transparency and opting for the lower-cost provider.
Nearly 50 percent of U.S. hospitals operate in the red.
The U.S. had 923,000 hospital beds in 1991 and 796,000 hospital beds in 2013, according to the American Hospital Association. The number is expected to continue to decrease as basic care shifts to clinics and hospitals consolidate and pursue more specialized procedures, like joint replacements or transplants. In Southeast Florida, where Barsoum is based, the average hospital occupancy rate hovers around 50 percent.
“Imagine if your factory, your show rooms, were only half-full,” Barsoum said. “You can’t make a living doing that. At some point you’re going to see more and more consolidation, and as we (hospitals) consolidate more and more, pressure will come to you (device companies) to cut prices. It’s the only way that healthcare in the U.S. is going to be successful, when there’s less money to be had.”
What does this mean for device companies?
Barsoum gave the orthopaedic professionals in attendance less of a warning and more of a mandate: device companies that want to get paid must spend resources to produce transformational devices, or to produce today’s clinically-proven devices at a lower cost. Hospitals will no longer purchase devices with incremental changes at a slight surcharge.
“If 96 percent of knee implants have survivorship at 15 to 20 years, do we need to continue to improve (these implants)? Do we need to spend money on improving results that are good? I would argue that we probably don’t,” Barsoum said. “The reality is that you’re not going to get paid for it. This is a paradigm shift in how we think about spending our research and development dollars. It requires a completely different thought process than how we’ve done it in the last 30 years.”
Barsoum’s comments offered context to the perspective provided by device company executives in Wednesday’s OMTEC keynote. That panel included:
- Doug Kohrs, Managing Director of startup Responsive Orthopedics and Past President and CEO of Tornier
- B. Sonny Bal, M.D., J.D., Chairman, President and CEO of Amedica and a joint replacement surgeon at the University of Missouri
- Ken Gall, Ph.D., Founder and Chief Technology Officer of MedShape and Chair of the Mechanical Engineering and Materials Science Department at Duke University
- Rod Mayer, President of Nextremity Solutions
All panelists agreed that one of today’s major obstacles to commercialization is getting products through value analysis committees—a challenge that will remain for the foreseeable future.
Dr. Gall, who has pushed new bio-materials like NiTiNOL and additively-manufactured devices through regulatory bodies, said FDA has a bad rap for its slow and convoluted processes, but the value analysis committees have been five times worse than FDA.
Mayer, too, noted that Nextremity has experienced value analysis committee decision-making terms from 30-60 days up to 18 months. Kohrs shed light on the Mayo Clinic’s process, adding that the hospital system’s new product committee has 14 people: one orthopaedic surgeon, one cardiologist and 12 accountants.
As a joint replacement surgeon at the University of Missouri’s orthopaedic hospital, Dr. Bal said that he and his colleagues face procedure-specific price parameters. If he wants to use a knee system that costs more than the set price, he must justify his decision to a committee. He described the uphill climb that is getting new materials and differentiated products through the committees.
What, then, will hospitals pay for? And what is needed to get through committees?
Barsoum, who sits on the new products committee at the Cleveland Clinic, said that if the device is not cheaper or if it’s new, companies must present one or more of the following: existing human data, level 1 studies, reproducible published studies in peer-reviewed literature and cost-benefit studies.
Herein lies the gap: development of differentiated products takes time and money. Collection of data takes time and money.
“A lot of devices don’t have clinical data,” Bal said. “You introduce a new knee system, and by the time you get clinical data that compares it to its predicate, it’s been a decade. Most of us are dead by that time.
“What the industry needs—and this is a challenge—is good, validated, short-term proxies for how something will perform over the long run. It’s very important so that we can go to value analysis committees and say, ‘Some clinical data is impossible to obtain because of ethical reasons; some are decades out, but here’s the valid testing we’ve done that shows an advantage.’ ”
Business changes, whether centering on manufacturing, marketing or organizational, take time and money, too. The price squeeze has driven consolidation at the device company and supplier level in order to increase breadth of product and capacity and achieve operational synergies. The price squeeze is expected to continue to drive device company and supplier consolidation, just as it has at the hospital level.
Amidst these market changes, all five keynote participants maintained that orthopaedic innovation is not dead. However, innovation will need to focus on differentiated products, efficient processes and surgeon education. The ability to navigate these pathways will stand as the greatest challenge throughout the next five years.
“On a positive note, wherever there’s change, there’s opportunity if you stay one step ahead of the curve, you understand where the markets are, understand that the customer we’re serving is changing—both in identity and demands,” Bal said. “When I was growing up as a surgeon, there wasn’t a whole lot of change—the model didn’t change from year to year. In the next five years, the model will flip upside down.”
Bal said that Amedica, which has a differentiated product in its use of Silicon Nitride in spine implants, has focused heavily upon publishing the material’s scientific advantages in order to combat price pressure.
In March, the company released results of its CASCADE (CAncellous Structured Ceramic Arthrodesis Device) study, a blinded, randomized clinical trial, showing that Silicon Nitride, a synthetic material, may heal and fuse as well as using PEEK spacers filled with autograft. Bal explained that the data is necessary to educate, excite and convince hospital administrators of the device’s cost savings. At the same time, Amedica has forged a partnership with Kyocera, the world’s largest manufacturer of Silicon Nitride, in order to reduce its manufacturing costs by 25 percent by making bigger, more cost-effective runs of the material.
“There’s a practical side of it,” Bal said, about overcoming price pressures. “You also have to ask, what is our product; how does it compete in the pricing model and how can we convince the customer that this product is, in fact, better?”
Nextremity Solutions commits a quarter of every dollar generated to research and development. The company’s second-highest investment lies in peer-to-peer education in order to arm surgeons with not only product knowledge, but tactics to combat the economic pressures that they face from administration and government.
A growing number of surgeons are dissatisfied with public and private payors and oversight of non-clinical decision markers; they seek to eliminate the barriers between operational cost and patient care.
“A salesman at heart, I think that the greatest challenge over the next five years is getting surgeons repositioned to drive the process of being empowered to utilize the products that we truly believe will provide the best results for the patients,” Mayer said. “My personal professional objective is to see surgeons take control of this business again and take it out of the bureaucratic structure of healthcare as we know it.”
In working to overcome that challenge, Nextremity will soon announce an exclusive agreement with a group of more than 325 foot and ankle surgeons. Frustration with market leaders’ slowness to commercialize personalized products drove this group to choose Nextremity as a partner.
Dr. Gall echoed the fact that an increasing number of surgeons seek to develop innovative devices, and also look to universities for assistance.
In Gall’s opinion, the biggest challenge that industry faces in the next five years is continuing to push innovation without increasing cost. More university incubators are commercializing medical devices, and surgeons are opting to work with these small entities that have a large amount of resources within large universities.
Through nearly the first half of 2015, the medtech index is up five percent, Kohrs said. Orthopaedic stocks are up about 2.6 percent this year. That’s compared to the cardiovascular space, in which device companies have seen stocks soar upward of nearly 20 percent in 2015, driven by new and novel product introductions.
In closing the Wednesday morning Executive Interview keynote, Kohrs urged investors and leaders to take note of the gap between growth in the cardiovascular and orthopaedic industries—specifically, what innovation could mean for orthopaedics. Dr. Barsoum closed his keynote in a similar vein.
Instead of spending money on incremental improvements in devices for total knee and total hip replacement—two of the most successful surgeries in improving quality of life—Dr. Barsoum challenged industry professionals to focus on producing implants that maintain quality and cost half the price. That might mean a material change. Alternatively, that might mean a manufacturing change. He urged industry to focus on the unknowns: how to decrease infection rates, kinematic conflict, unidentified pain.
“If you’re going to take knee replacement X and you’re going to make X prime, that’s fine, but you’re doing it on your own dime,” Barsoum said. “And next year, you’re not going to get a three percent raise for it; you’re going to get a three percent decrease.
“Do something that as a healthcare administrator I can’t live without. If you don’t do that, don’t expect to get paid more money. It’s a challenge. It’s a thought process, but as leaders in this industry, we have to be thinking about it.”
Price pressure will continue to drive the orthopaedic industry’s narrative in coming years as cost containment measures from public and private payors trickle through the healthcare supply chain. Opportunities will present themselves, though, to device companies that are able to innovate through products that improve outcomes or through...
Price pressure will continue to drive the orthopaedic industry’s narrative in coming years as cost containment measures from public and private payors trickle through the healthcare supply chain. Opportunities will present themselves, though, to device companies that are able to innovate through products that improve outcomes or through processes that decrease costs.
This was the outlook provided by orthopaedic leaders of device companies, hospital systems and universities at OMTEC® 2015, the Orthopaedic Manufacturing & Technology Exposition and Conference.
“The reality is that as physicians and hospitals have to deal with a set of changing rules, manufacturers and industry also have to deal with that same set of changing rules,” said Wael Barsoum, M.D., President of Cleveland Clinic Florida and Vice Chairman of the hospital system’s Orthopaedic Department.
Specifically, Barsoum spoke of the U.S. movement from a volume-based, fee-for-service healthcare model to one that is value-based and outcomes-oriented. He showed the equation Value = Quality/Cost, explaining that either surgeons and hospitals are going to need to improve quality without raising cost, or will need to reduce the cost without compromising quality. If surgeons/hospitals fail to demonstrate that basic concept to the Centers for Medicare and Medicaid Services (CMS), then reimbursement is docked.
Hospitals’ pressure on device companies relative to price will remain, because this is only the beginning of the move to a value-based model. In 2014, about 20 percent of Medicare reimbursements were considered to be value-based. In January 2015, the U.S. Department of Health & Human Services announced its goal to link 90 percent of fee-for-service Medicare payments to value or quality by 2018. Though Medicare is driving this model, private payors are following suit.
During his Thursday keynote OMTEC address, Dr. Barsoum provided revealing numbers to show how reduced reimbursement and consumer-driven transparency are impacting hospital revenues and budgets.
The Cleveland Clinic reports 115 quality metrics for every Medicare patient. In 2005, the number of metrics was ten. This collection is mandated by Medicare, and that mandate takes time, effort and money, which means fewer resources to devote to devices.
The number of Medicare beneficiaries is expected to increase from 54 million in 2014 to 61 million in 2022, up 13 percent, per CMS. During that same time period, Medicare is expected to decrease payments by $419 billion in order to slow its growth rate, according to the Congressional Budget Office (CBO). (Medicare spending reached just under $500 billion in 2014 and is expected to surpass $800 billion by 2022, which is growth of about four percent. In the first decade of the 2000s, Medicare spending grew at a rate of about six percent, according to the CBO.)
The number of Americans on high deductible insurance plans has risen from 19 percent in 2009 to 36 percent in 2014, according to the Centers for Disease Control and Prevention. As those covered by private insurance are asked to pick up more of the bill, they’re seeking price transparency and opting for the lower-cost provider.
Nearly 50 percent of U.S. hospitals operate in the red.
The U.S. had 923,000 hospital beds in 1991 and 796,000 hospital beds in 2013, according to the American Hospital Association. The number is expected to continue to decrease as basic care shifts to clinics and hospitals consolidate and pursue more specialized procedures, like joint replacements or transplants. In Southeast Florida, where Barsoum is based, the average hospital occupancy rate hovers around 50 percent.
“Imagine if your factory, your show rooms, were only half-full,” Barsoum said. “You can’t make a living doing that. At some point you’re going to see more and more consolidation, and as we (hospitals) consolidate more and more, pressure will come to you (device companies) to cut prices. It’s the only way that healthcare in the U.S. is going to be successful, when there’s less money to be had.”
What does this mean for device companies?
Barsoum gave the orthopaedic professionals in attendance less of a warning and more of a mandate: device companies that want to get paid must spend resources to produce transformational devices, or to produce today’s clinically-proven devices at a lower cost. Hospitals will no longer purchase devices with incremental changes at a slight surcharge.
“If 96 percent of knee implants have survivorship at 15 to 20 years, do we need to continue to improve (these implants)? Do we need to spend money on improving results that are good? I would argue that we probably don’t,” Barsoum said. “The reality is that you’re not going to get paid for it. This is a paradigm shift in how we think about spending our research and development dollars. It requires a completely different thought process than how we’ve done it in the last 30 years.”
Barsoum’s comments offered context to the perspective provided by device company executives in Wednesday’s OMTEC keynote. That panel included:
- Doug Kohrs, Managing Director of startup Responsive Orthopedics and Past President and CEO of Tornier
- B. Sonny Bal, M.D., J.D., Chairman, President and CEO of Amedica and a joint replacement surgeon at the University of Missouri
- Ken Gall, Ph.D., Founder and Chief Technology Officer of MedShape and Chair of the Mechanical Engineering and Materials Science Department at Duke University
- Rod Mayer, President of Nextremity Solutions
All panelists agreed that one of today’s major obstacles to commercialization is getting products through value analysis committees—a challenge that will remain for the foreseeable future.
Dr. Gall, who has pushed new bio-materials like NiTiNOL and additively-manufactured devices through regulatory bodies, said FDA has a bad rap for its slow and convoluted processes, but the value analysis committees have been five times worse than FDA.
Mayer, too, noted that Nextremity has experienced value analysis committee decision-making terms from 30-60 days up to 18 months. Kohrs shed light on the Mayo Clinic’s process, adding that the hospital system’s new product committee has 14 people: one orthopaedic surgeon, one cardiologist and 12 accountants.
As a joint replacement surgeon at the University of Missouri’s orthopaedic hospital, Dr. Bal said that he and his colleagues face procedure-specific price parameters. If he wants to use a knee system that costs more than the set price, he must justify his decision to a committee. He described the uphill climb that is getting new materials and differentiated products through the committees.
What, then, will hospitals pay for? And what is needed to get through committees?
Barsoum, who sits on the new products committee at the Cleveland Clinic, said that if the device is not cheaper or if it’s new, companies must present one or more of the following: existing human data, level 1 studies, reproducible published studies in peer-reviewed literature and cost-benefit studies.
Herein lies the gap: development of differentiated products takes time and money. Collection of data takes time and money.
“A lot of devices don’t have clinical data,” Bal said. “You introduce a new knee system, and by the time you get clinical data that compares it to its predicate, it’s been a decade. Most of us are dead by that time.
“What the industry needs—and this is a challenge—is good, validated, short-term proxies for how something will perform over the long run. It’s very important so that we can go to value analysis committees and say, ‘Some clinical data is impossible to obtain because of ethical reasons; some are decades out, but here’s the valid testing we’ve done that shows an advantage.’ ”
Business changes, whether centering on manufacturing, marketing or organizational, take time and money, too. The price squeeze has driven consolidation at the device company and supplier level in order to increase breadth of product and capacity and achieve operational synergies. The price squeeze is expected to continue to drive device company and supplier consolidation, just as it has at the hospital level.
Amidst these market changes, all five keynote participants maintained that orthopaedic innovation is not dead. However, innovation will need to focus on differentiated products, efficient processes and surgeon education. The ability to navigate these pathways will stand as the greatest challenge throughout the next five years.
“On a positive note, wherever there’s change, there’s opportunity if you stay one step ahead of the curve, you understand where the markets are, understand that the customer we’re serving is changing—both in identity and demands,” Bal said. “When I was growing up as a surgeon, there wasn’t a whole lot of change—the model didn’t change from year to year. In the next five years, the model will flip upside down.”
Bal said that Amedica, which has a differentiated product in its use of Silicon Nitride in spine implants, has focused heavily upon publishing the material’s scientific advantages in order to combat price pressure.
In March, the company released results of its CASCADE (CAncellous Structured Ceramic Arthrodesis Device) study, a blinded, randomized clinical trial, showing that Silicon Nitride, a synthetic material, may heal and fuse as well as using PEEK spacers filled with autograft. Bal explained that the data is necessary to educate, excite and convince hospital administrators of the device’s cost savings. At the same time, Amedica has forged a partnership with Kyocera, the world’s largest manufacturer of Silicon Nitride, in order to reduce its manufacturing costs by 25 percent by making bigger, more cost-effective runs of the material.
“There’s a practical side of it,” Bal said, about overcoming price pressures. “You also have to ask, what is our product; how does it compete in the pricing model and how can we convince the customer that this product is, in fact, better?”
Nextremity Solutions commits a quarter of every dollar generated to research and development. The company’s second-highest investment lies in peer-to-peer education in order to arm surgeons with not only product knowledge, but tactics to combat the economic pressures that they face from administration and government.
A growing number of surgeons are dissatisfied with public and private payors and oversight of non-clinical decision markers; they seek to eliminate the barriers between operational cost and patient care.
“A salesman at heart, I think that the greatest challenge over the next five years is getting surgeons repositioned to drive the process of being empowered to utilize the products that we truly believe will provide the best results for the patients,” Mayer said. “My personal professional objective is to see surgeons take control of this business again and take it out of the bureaucratic structure of healthcare as we know it.”
In working to overcome that challenge, Nextremity will soon announce an exclusive agreement with a group of more than 325 foot and ankle surgeons. Frustration with market leaders’ slowness to commercialize personalized products drove this group to choose Nextremity as a partner.
Dr. Gall echoed the fact that an increasing number of surgeons seek to develop innovative devices, and also look to universities for assistance.
In Gall’s opinion, the biggest challenge that industry faces in the next five years is continuing to push innovation without increasing cost. More university incubators are commercializing medical devices, and surgeons are opting to work with these small entities that have a large amount of resources within large universities.
Through nearly the first half of 2015, the medtech index is up five percent, Kohrs said. Orthopaedic stocks are up about 2.6 percent this year. That’s compared to the cardiovascular space, in which device companies have seen stocks soar upward of nearly 20 percent in 2015, driven by new and novel product introductions.
In closing the Wednesday morning Executive Interview keynote, Kohrs urged investors and leaders to take note of the gap between growth in the cardiovascular and orthopaedic industries—specifically, what innovation could mean for orthopaedics. Dr. Barsoum closed his keynote in a similar vein.
Instead of spending money on incremental improvements in devices for total knee and total hip replacement—two of the most successful surgeries in improving quality of life—Dr. Barsoum challenged industry professionals to focus on producing implants that maintain quality and cost half the price. That might mean a material change. Alternatively, that might mean a manufacturing change. He urged industry to focus on the unknowns: how to decrease infection rates, kinematic conflict, unidentified pain.
“If you’re going to take knee replacement X and you’re going to make X prime, that’s fine, but you’re doing it on your own dime,” Barsoum said. “And next year, you’re not going to get a three percent raise for it; you’re going to get a three percent decrease.
“Do something that as a healthcare administrator I can’t live without. If you don’t do that, don’t expect to get paid more money. It’s a challenge. It’s a thought process, but as leaders in this industry, we have to be thinking about it.”
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Carolyn LaWell is ORTHOWORLD's Chief Content Officer. She joined ORTHOWORLD in 2012 to oversee its editorial and industry education. She previously served in editor roles at B2B magazines and newspapers.
