The Business Side of Medical Devices

Medical devices, products of decades of innovation and technological breakthroughs, save lives every day. They also are big business. The United States medical device market alone is worth approximately $148 billion dollars annually. It accounted for nearly half of the total global market in 2015, and an aging American population in need of medical care is pushing that number higher every year.

With this increase in sale of medical devices, there has also been an increase in what’s called Physician-Owned Distributorships (PODs), in which individual physicians profit from the medical devices that they use in their practice. Many of the physicians who are involved with PODs believe that they have the potential to decrease medical device costs to patients and hospitals over the long run, but are they ethical?

The Rise of Physician-Owned Distribution

The term “medical device” can be applied to products ranging from mint dental floss to cutting-edge prosthetic limbs, but one of the biggest sections of the medical device market are the implantable devices and tissue composites that are used in orthopedic surgery. These include the hinges, screws, and sockets needed for joint replacement surgeries, and gels and putties made from bone and growth factors. It’s within the expanding market around orthopedic surgery that PODs are popping up.

A typical POD is a special sales arrangement between a physician (or a physician group) and a medical device manufacturer. It puts physicians in a position where they earn revenue directly from medical device sales, on top of the revenue that they already make from the surgical procedures the devices are used in. Most of the time, the sales chain works the way you would expect: medical device manufacturers sell their products to hospitals through independent distributors or the company’s own sales representatives. Hospitals provide the devices to surgeons for use in their operating rooms, and the patient is billed for the cost of the device.

But only a small group of companies manufacture and sell the specialized implants used in spinal fusion and joint replacement surgeries. With so little competition in the field, there is little incentive to push costs down. Organizations like the American Association of Surgeon Distributors believe that PODs are the “only form of real competition to help lower prices,” because they take some of the market away from the big manufacturers. As long as transparency can be maintained, they say, PODs are a good thing for patient safety and for patients’ wallets.

Physicians making money off the devices they’re implanting isn’t necessarily a bad thing. In a typical arrangement, the physician is purchasing shares of the device manufacturing company in return for the potential sales revenue. That purchase is essentially an investment in the company, and the extra cash flow can then be used for research and development into new technologies. Physicians often drive innovation forward by identifying products and processes that need improvement, and partnerships with medical device manufacturers are an efficient way to get ideas into manufacture. Supporters of PODs say that this arrangement often allows for better price negotiations, especially when several PODs group together and leverage their buying power.

When POD Goes Wrong

Cutting costs to patients is hard to argue against, but some groups worry that PODs create a financial incentive for physicians to recommend and perform more surgery, maybe even unnecessary surgery, for their patients. Implant more devices, and make bigger profits. Even the U.S. government sees the potential for conflict of interest and called for an investigation, and the Senate Finance Committee has seen fit to hold hearings and perform a thorough study of PODs to determine what they might mean for patient care and safety.

The investigation found that one-third of the hospitals they investigated were buying their spinal surgery implants from PODs, but 40% of those hospitals were not aware that their purchase agreement was with a POD. Many of those PODs were owned by physicians affiliated with those hospitals. According to the investigation, “hospitals ranked surgeon preference over quality and effectiveness of devices as factors that influenced their decision to purchase spinal devices from PODs.” That is cause for concern.

While it’s unlikely that all, or even most, PODs are shady physician kickback schemes, they must take measures to avoid any appearance of appearing so. Transparency is important for both the hospitals and surgical centers buying the devices, and for the patients receiving them.

The Senate report concluded with recommendations for improving transparency and protecting patients from unnecessary surgeries. For example, they suggest that Federal law should require physicians to disclose any financial connections or conflicts of interest that they or their families may have, and that law enforcement should be empowered to charge and prosecute any physician who threatens to remove their practice from a hospital if their POD isn’t supplying the hospital’s medical devices.

Outside of federal law, however, the report also recommended that hospitals adopt clear policies  to govern their interaction with PODs, and enforce them consistently. And as always, a hospital shouldn’t assume that the POD is providing them with the best deal – due diligence is necessary to ensure that all patients are getting the right products for the right price, and only if they really need them.