Four lessons about the orthopedics industry from the CEO of group purchasing organization Amerinet

Few sectors have been impacted by healthcare reform more than the orthopedics industry. And the looming merger of Zimmer ($ZMH) and Biomet threatens to bring even more change and further consolidation. To get another perspective, FierceMedicalDevices spoke with Todd Ebert, the CEO of group purchasing organization Amerinet.

Amerinet offers its 75,000+ member healthcare providers--including about 29,000 clinics and 3,300 acute care hospitals--a contract portfolio that it says can result in savings of up to 16% on medical and surgical products and services such as orthopedics.  

Every organization, every hospital that we know has to reduce costs. One of the biggest areas where they have to reduce costs is in the device side, either cardiology or orthopedics."

It negotiates with the top industry players on behalf of providers to help them secure low prices on medical devices. Given his direct contact with the orthopedics industry, Ebert offered valuable lessons about the rapidly changing market. Here are four takeaways.

Prices will stay low

Amerinet's Todd Ebert

Between 2007 and 2011, the inflation-adjusted prices of artificial hips fell 23% and those of artificial knees by 17%, according to an AdvaMed study. Expect more of the same going forward.

"Every organization, every hospital that we know has to reduce costs. One of the biggest areas where they have to reduce costs is in the device side, either cardiology or orthopedics," Ebert said.

"The Affordable Care Act is a catalyst for change because they're not getting paid anymore," he added, referring to the tightening of Medicare reimbursement, which is now declining on a per-person basis.

Furthermore, product differentiation in the orthopedics industry is low, which means they are being priced like commodities, Ebert said: "There's not a lot of room for price increases unless there's something unique from the technology standpoint, but when you talk to the clinicians that know these things, they're saying that there's not a whole lot of difference between these things."

The Zimmer-Biomet merger won't change the trend

Some fear the impending acquisition of Biomet by Zimmer for $13.4 billion will increase prices due to the reduction in competition, but Ebert said the industry will remain competitive, although he predicted more consolidation in the future.

"There are still four strong players out there, and so there is still competition," he said, referring to Zimmer-Biomet, Johnson & Johnson's ($JNJ) DePuy, Stryker ($SYK) and Smith & Nephew ($SNN). "If there were two providers, yes, we'd be concerned."

Ebert said the acquisition will give the combined company a wider portfolio, with Biomet's higher-end specialty products augmenting Zimmer's offerings, but acknowledged that there will be some duplication as well. "It will be interesting to see if they choose to standardize their portfolio or if they keep everything they currently have," he said.

Overall, the deal is more of a reaction to the industry trend toward lower margins and higher volumes than an attempt to change the dynamics. Ebert said the merger won't change Amerinet's approach toward negotiating with the orthopedics industry to secure lower prices for customers.   

Hospitals are gaining leverage by using fewer suppliers

Ebert confirmed claims by orthopedics industry executives that hospitals are cutting costs by purchasing implants in greater bulk from two or three manufacturers, instead of four or five. In fact, the website urges customers to "save up to 15 percent on targeted purchases by committing volume to a single supplier" via a custom contract.

"Those customers who are really aggressive will say 'We're going to move from five suppliers to three suppliers, or four suppliers to two suppliers.' With that commitment and that volume, suppliers for the most part are willing to be very competitive with pricing," he said.

The trend toward fewer suppliers per hospital has increased industry pressure to consolidate and move toward higher volumes and lower margins. 

Ebert emphasized the importance of involving clinicians in the decision-making process, for the savings from buying in bulk also involves sacrificing the level of clinicians' choice among competing products.

Another trick employed by hospitals is bundling payments, he said, meaning they offer a single aggregate payment per patient encounter or surgery, including for complications suffered 30 to 90 days thereafter. This payment method is associated with the ambulatory surgery market but is becoming more common in the orthopedics industry as well.

"The [bundled] payment is made to one entity, and those who participate in giving care to the patient have to decide how that payment will be divided amongst all contributors for that one patient encounter," he said. "It sort of forces providers to ensure everything is done correctly so the patient doesn't come back and use any more of the allotted money."

Price transparency is improving, but behind the scenes

Manufacturers of orthopedics have long been plagued by complaints that they don't post their prices or tell purchasers how much they charged others. In fact, independently aligned Sen. Angus King of Maine recently proposed banning the industry practice of preventing hospitals from revealing the price of their implants.

But Ebert said the practice is less common than in the past, when customers were sometimes forbidden from sharing the pricing information even within their own organizations. The CEO believes price transparency is improving and said that manufacturers now generally allow customers to share pricing data with third-party organizations such as his own (although the website says that custom contracts "are exclusive to the initiating healthcare provider and not available to other Amerinet members"). Amerinet then uses the information to create pricing benchmarks for its customers.

Ebert said that Amerinet advises customers not to agree to confidentiality clauses in contracts "because if that's the case, we can't help you," adding, "we're all about letting our organizations use the data that's appropriate for them."

"Do we define as everybody putting their data out on the Internet? No, we don't," he said. A splashy move like that, or a ban on confidentiality provisions, would surely quiet the critics. The incremental removal of confidentiality provisions will also result in greater price transparency, but will the change be sufficient (or well-known enough) to placate the critics?

-- Varun Saxena (email | Twitter)

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