Can Physician-Owned Distributorships Save Money & Reform the Device Industry?

John Steinmann, DO, is a California-based orthopedic surgeon and a board adviser for the American Association of Surgeon Distributors, a non-profit association created to set standards for surgeon-owned distributorships. Dr. Steinmann also has an ownership interest in a physician-owned device distributorship and device companies.

The Office of the Inspector General released a report this fall about the use of PODs, warning against inappropriate use.

However, Dr. Steinmann is a proponent of physician ownership of medical device distribution and argues that such a model can save the industry and patients significant dollars. Here he discusses what it takes to make a POD work well and save money.

Question: What are the key elements to modeling physician ownership in medical device distribution appropriately to meet the goal of reducing implant costs?

Dr. John Steinmann: First is intent, [as far as] cost savings that are sustainable and obtained in a legal and ethical manner. Surgeons must enter this with the intent to align with the interests of their patients, hospitals and communities to bring effective market forces to bear on the acquisition of high quality medical devices. They must intend to create cost savings that are meaningful and lasting. This requires financial commitment and continued work to run the business of distribution and hence compensation and return on investment are appropriate but compensation or return on investment cannot serve as the primary intent.

Second, is competition based on value. We all know that a consideration of price is largely absent in every physician's choice of implant. Surgeons are appropriately given the right to decide on their implants but are not in any manner responsible to pay for that choice which represents the most fundamental of flaws that can occur in a market. Surgeons need to take time to create competition among like quality manufacturers that is based on value.

Lastly, hospitals have a duty to ensure value in their services and many hospital systems completely disregard this. In many circumstances, hospitals view the implant as a revenue source due to their ability to charge invoice plus a percentage. This has developed as our greatest difficulty in achieving success with this model. Hospitals need to better understand their social mission to improve the value of their services and not propagate this market failure for their own benefit.

In summary, achieving cost savings with this model requires proper intent on behalf of the surgeon, establishment of effective competition based on value (quality/cost) and a cooperative, properly intentioned, hospital that will align with the surgeons to ensure the patient and the community are afforded of the very best products at a fair price.

Q: What opportunity does physician ownership in medical device distribution present to the healthcare system? What opportunities are there for hospitals?

JS: Potentially the most fundamental flaw in our healthcare system revolves around the absence of any effective market forces or consumerism to control pricing. Physician ownership in medical device distribution offers an opportunity for the healthcare system to witness how a knowledgeable consumer (surgeon) creating competition can dramatically improve the value of the services that are provided to the American public.

Opportunities for hospitals are, again, an interesting discussion. For those hospitals that have a social consciousness and those that are heavily burdened with Medicare or other at-risk contracts or burdened with a large amount of indigent care, the surgeon-owned distribution model can and will save that hospital a great deal of money. Unfortunately, for those hospitals that look to exploit the lack of transparency in device pricing and who believe their charter is to make money any way they can, the model will not be of benefit to them.

Q: How can physicians align with hospitals to meet clinical and financial goals related to supply use and costs?

JS: The model of surgeons aligning with their hospital under a service line co-management model is an extremely effective means of improving patient satisfaction, improving operational efficiencies and reducing costs associated with the delivery of healthcare. Healthcare delivery cannot be effectively managed entirely from behind the doors of the C-Suite. There needs to be empowerment of those on the front line to establish expectations and ensure that the focus always remains on patient outcome, patient safety, patient satisfaction and resource efficiency. I have seen first hand how this model can transform the way healthcare is delivered.

Q: Where do you see physician ownership in medical device distribution headed in the future?

JS: This model poses a serious threat to a very lucrative industry and it can be expected that the established industry incumbents will continue to try and create a public perception of wrongdoing related to this model. The problem for them, and the reason why there has never been a head-to-head debate on this, is that the model makes perfect sense. Why not create effective competition? Why not purchase in bulk where there is a shared inventory risk? Why not join the decision maker and the purchaser? These exist in nearly every other market in the world.

We all know there are dubious surgeons out there who cannot see beyond their self interests. While we absolutely need to endorse methods to prevent such individuals from exploiting a market failure (which would occur with endorsement of the standards published by the American Association of Surgeon Distributors), we also must move beyond the "bad doctor" discussion to a discussion of a solution. When compared to European countries, we pay twice as much for medical devices as they do. Even our own devices sell for half as much oversees. Interestingly, countries in Europe utilize a stocking distribution model analogous to the surgeon-owned distribution model we are discussing.

I believe that those in Washington, D.C., who are charged with protecting the public trust will eventually provide affirmative guidance that will allow the model to be utilized as part of a well-intentioned alignment strategy between hospitals and surgeons.