I was at a conference in Chicago a couple of months ago attended by a lot of “money” people—investment bankers, venture capitalists, companies looking for investors, and folks wanting to invest for their clients. Inevitably, the issue of reimbursement, average selling prices for devices, and how to get paid arose. More than one of the speakers reported on the fact that the largest component of a medical device is not research and development, not manufacturing costs, but “SG&A” (selling, general, and administrative expenses). Although this category contains elements such as royalty payments, insurance, and general administration, the largest element is the payment to the sales group, i.e. the sales reps and the organization that they report through. In this newsletter, we report that the average SG&A for seven orthopedic companies was 43.3% in 2009.
I told the audience a story about a trip that I made to Lund, Sweden in 2003, where the national Swedish knee registry is maintained. I was there one evening watching Toby (the data entry person) enter the information on knee replacements into their database. Sweden is a “long” country with hospitals located at or near the Arctic circle, and transportation to some of these locations can be problematic in the best of times.
I asked Toby how often the orthopedic reps visit the hospitals, and his question was “what’s a rep?”
Because the national health system in Sweden contracts directly with manufacturers to purchase knee implants, the cost of hip and knee implants is about half that in the United States. I have seen hospitals in the US that negotiate prices for hip and knee implants approaching the European ones, but these hospitals have basically eliminated the need for the reps from their hospital. And many hospitals that I talk to question the value of the rep in the first place.
The argument for the rep is the reiteration of the valuable services performed by them—inservice training of physicians and hospital staff, templating and planning cases, ensuring all of the equipment, implants, and staff are available, etc. In the opinion of some of the hospital staff I have talked to, “repless” implants wouldn’t work “because the physicians would be lost without the reps.”
I have heard from some manufacturers that hospitals treat the reps as “unpaid” labor, and dump all sorts of responsibilities on them, which would normally belong to the hospital. Of course the response to that is that the labor is not “unpaid” since the labor costs are packaged in with the price of the implant.
The rep service that seems most valuable from the hospitals standpoint is training hospitals and surgeons in the use of new implant systems. Reps who know their systems assist everyone in the surgical procedure. This can actually improve patient outcomes from what they would be without this intervention.
However, it is not clear that “new” systems are necessary or even desirable. I believe Sweden and other hospitals are able to survive in a “repless” environment simply because they don’t use that much new stuff. If one looks at the implants that are available to hospitals overseas, it is a fraction of the number of options and systems that are available in the United States, and generally of an older design. And with the greater number of options comes greater dependence on the reps to sort it all out, and quite likely, the possibility of error by mixing up the devices, parts, instruments, and systems.
However, who is demanding the new systems? You can point to the surgeons, but I don’t think that’s completely fair. Any trip down the supermarket aisle will have reports about the “latest” innovation in joint replacement, drug therapy, or other medical device that is reported to cure arthritis or some other debilitating disease. And who hasn’t insisted on upgrading to the latest cell phone, iPad, or computer software? I believe that the need for the “latest and greatest” is inherent to our collective national conscience, even though this can lead to its own problems.
If reps are necessary to sort out all of the “stuff,” then reducing the dependence on the reps will require reducing the amount of “stuff” that hospitals and surgeons will need to sort out.
There has been an ongoing debate about whether the “latest and greatest” implant devices actually help patients more than the older devices they replace. Getting patients to recognize that “tried and true” may result in better outcomes than “latest and greatest” will be a challenge in education for all of us.