The Business Side of Medical Devices: Physician-Owned Distributorships

Medical devices are products of decades of innovation and technological breakthroughs. They save lives every day. They also are big business.

The United States medical device market is worth approximately $156 billion dollars annually. It accounted for 40% of the total global market in 2017. Now, an aging American population in need is pushing that number higher every year.

This increase in medical device sales lead to interest in Physician-Owned Distributorships (PODs). PODs sell medical devices, sometimes to the physicians who own the POD. This allows physicians to profit from the devices used in their medical practice. Many physician-owners believe they can use their PODs to decrease the cost of healthcare. Even if they can, are PODs ethical?

The Rise of Physician-Owned Distribution

The term "medical device" applies to a vast number of products. Mint dental floss and cutting-edge prosthetic limbs are medical devices. So are cotton swabs and pacemakers. One of the biggest medical device classes includes those used in orthopedic surgery. And PODs seem to be popping up frequently in this large orthopedic surgery market.

Patients are suing over hip replacements, but it has nothing to do with PODs. Learn more here.

How Physician-Owned Distributorships Work

Before PODs, the medical device sales process was simpler. Medical device manufacturers usually sold their products through one or both of the following routes:

1. Independent distributors
2. The company's own sales representatives

Hospitals purchased medical devices through these channels. Surgeons then used the devices in the operating room. After surgery, the patient would receive a bill for the cost of the device. PODs introduced another layer in this process.

PODs created a sales arrangement between a physician and a manufacturer. This makes the POD a middle-man between a hospital and medical device manufacturer. It also allows physicians to earn revenue directly from medical device sales, much like an independent distributor. This revenue adds to the money they make performing surgery with those devices.

Now, if you know anything about middlemen, you probably know they often inflate prices. Yet POD proponents claim they do the exact opposite.

PODs Claim Competition Cuts Costs

Spinal fusion and joint replacement surgeries are complex and require specialized implants. Only a small group of companies manufacture and sell these unique medical devices. With little competition, manufacturers are not motivated to compete based upon price.

The American Association of Surgeon Distributors (AASD) advocates for POD standards and ethics. AASD believes that PODs are the "only form of real competition to help lower prices." PODs take some of the market away from the big manufacturers, which AASD claims can help drive down costs. According to AASD, PODs are beneficial, as long as they maintain transparency. But do they?

PODs Increase Surgery Rates, Don't Cut Costs

The Office of the Inspector General (OIG) has issued multiple reports on PODs. These reports have uncovered a number of concerning trends, including:

• Hospitals who buy implants from PODs perform 29% more surgeries than those who do not.
• POD-purchased devices are not cheaper than those purchased traditionally.
• POD-purchased spinal plates are more expensive than those purchased from the manufacturer.

According to the OIG, the rate of surgeries in POD-using hospitals raises serious questions. It seems to indicate physicians may be performing unnecessary surgeries.

The Senate Finance Committee has also investigated PODs. Its findings raise even more concerns:

• One third of investigated hospitals bought implants from PODs.
• 40% of POD-purchasing hospitals did not know they were buying from PODs.
• Many physician-POD owners were selling devices to their hospital-employers.

The report says hospitals valued "surgeon preference over quality" when choosing medical devices. This means PODs do the opposite of what their proponents claim. They actually eliminate competition. Because unethical POD owners can simply sway purchasing decisions with their preferences. And that is cause for concern.

PODs Are Still Legal and Problematic

The Senate report concluded with a set of recommendations, including:

• Physicians should tell hospitals and patients if they have a relationship with a POD.
• Surgeries utilizing POD-supplied implants should face higher scrutiny from hospitals.
• Law enforcement should continue investigating potentially illegal POD behavior.

The most recent senate report was released in May 2018. Since then, none of the recommendations have become federal law. But hospitals and medical device purchasers can still enact their own POD-regulations.

Hospitals can adopt clear policies to govern their interaction with PODs. They can also choose to enforce these policies consistently. And, hospitals should never assume that a POD is providing the best deal. Due diligence alone can ensure that all patients are getting the right products for the right price.

As it stands, PODs seem to be ethically questionable at best. But perhaps when the COVID-19 pandemic finally clears, regulators can get back to the important work of enacting sensible POD ethics standards.