Staking Ground in Orthopedics

Managed care is forcing suppliers and their customers into new and sometimes difficult alliances. Just a couple of years ago, few US hospitals had programs in place that reduced orthopedic implant costs through standardization and other product management strategies. If this year's Technology Futures Panel on Orthopedics sponsored by Premier Health Alliance is any indication, it seems not having such a program is the exception today.

Managed care is forcing suppliers and their customers into new and sometimes difficult alliances.

• Two years ago, at Premier Health Alliance’s first Technology Futures Panel on Orthopedics, the notion of standardizing on implants was new and the mood of the meeting was upbeat.

• But the mood at this year’s Orthopedics panel was different: anxiety has replaced novelty as everyone scrambles to stake their ground in managed care’s zero-sum game.

• While hospitals and surgeons talk of new partnerships to deal with managed care, the challenge for implant companies is to participate in that partnership as an equal, and not just a vendor of commodity products.

Just a couple of years ago, few US hospitals had programs in place that reduced orthopedic implant costs through standardization and other product management strategies. If this year’s Technology Futures Panel on Orthopedics sponsored by Premier Health Alliance is any indication, it seems not having such a program is the exception today.

But programs to reduce implant costs are only the most visible of wide-reaching changes affecting orthopedic providers and their suppliers. Managed care’s pervasive influence is dramatically limiting the future of a specialty that until recently was one of the fastest growing, highest revenue generators for physicians, hospitals, and suppliers alike.

Precisely what impact managed care will have on the orthopedics industry remains to be seen. The implicit tradeoff between cost and quality is one that both payers and providers seem reluctant to make, notwithstanding diminishing resources. In the short term, while providers and suppliers alike talk of the need to work together to deal with the new economics of managed care, the reality is that each is staking its turf in an increasingly constrained marketplace.

Attacking Implant Costs

While managed care’s impact on orthopedics is far reaching, it was the practical experience of hospitals in dealing with run-away orthopedics programs that took center stage at the Premier conference. Several hospitals, including St. Luke’s Episcopal Hospital in Houston, told of their success in driving down implant costs through aggressive standardization programs.

Driving St. Luke’s need to get its orthopedics program under some kind of control: Columbia/HCA Healthcare Corp.’s looming presence. When Columbia’s acquisition of HealthTrust-The Hospital Co. is completed, the company will own 19 hospitals in the Houston area, and it recently announced plans to build a major facility to do orthopedic procedures.

According to John Lynch, SVP, Professional and Clinical Services, St. Luke’s orthopedic program began in 1993, focusing on total joint replacements which had been an area of high losses for the hospital (50% of its implant cases were Medicare patients; 45% were managed care). Specifically, the initiative was built on five components: implant standardization, demand matching, outcomes management, comprehensive patient education, and discharge planning. The implant standardization program, in particular, took bids from 12 vendors before selecting one with which it signed a three-year, sole-source deal. Today, compliance to the contract is at 96%.

Key to the program is surgeon involvement, both in identifying the need to reduce costs and for qualifying the bidders on the implant program. “It wasn’t the hospital driving this process, it was the surgeons,” he says. “They were the ones who came to us and said implant costs are too high and we’re too unproductive in the OR. Of course, we [St. Luke’s administrators] were more than happy to agree with them.”

Indeed, says Lynch, “Doctors don’t mind change, what they don’t like is being changed.” Surgeon participation is particularly important as the hospital has moved beyond standardization to more clinically-oriented programs, such as patient demand matching, which, he goes on, represents a much more dramatic opportunity for savings than standardization. (Under demand matching, patient characteristics such as age, weight, and lifestyle are plotted and matched with appropriate types of implants.) And it will become even more important as institutions turn to programs such as outcomes management that take a broader view of the entire episode of care.

As critical as surgeon involvement to the success of such implant programs is having accurate data to track implant cost and utilization and analyze the myriad information about who is using what products and resources in providing orthopedic care. (Several speakers used slides with the maxim: “If you can’t measure it, you can’t manage it.”) Kathleen Killeen, senior director of orthopedic services at HealthEast, a St. Paul-based multi-hospital system, noted that HealthEast didn’t even know what they were spending on implants before launching their standardization program. “All of the products we purchased from Zimmer Corp., a unit of Bristol-Myers Squibb Co., and Johnson & Johnson were lumped together,” she notes. “We knew the overall figure was $3.5 million, but when surgeons asked how much hips cost compared to knees, or how much one surgeon was spending compared to another, we had no idea.”

In particular, initiatives such as patient demand matching require sophisticated databases to work effectively. For HealthEast, the inability to track and manage utilization was steering the system toward crisis: 1992 losses on total joint procedures were over $1 million. Implant costs reached 43% of the total procedure cost, dwarfing all other expenses, including the OR (a relatively modest 19%). More importantly, by failing to manage implant costs, HealthEast had seen its average implant cost soar to 33% above the national average ($3,200 per case vs. $2,400).

More Than Just Price Cutting

Implant suppliers are helping customers with the data challenge, offering programs to track outcomes, plot demand matching, and capitate costs. But with the importance of data comes a risk: so complex is the process of managing data that even those who most need it don’t always know what data they want or how to use it. Thus one speaker at the conference argued that most managed care organizations “don’t have a clue about how to use sophisticated data” to measure quality of care and quality of services.

Suppliers face a special risk as a result of the complexity of the data needs: it’s hard enough creating capitated programs when the hospital has only one managed care contract; how do you develop true risk-sharing when the hospitals’ own risk is based on contracts with six or seven MCOs?

Still, using data effectively has been critical to the efforts of hospitals like HealthEast and St. Luke’s to gain control over their orthopedics programs, and both have already achieved measurable results. At HealthEast, the number of implant suppliers has gone from 16 to four for both hips and knees, while the average cost per case for implants has dropped to $2,500, a savings of more than $1,000 per case if the cost of implant price inflation is factored into HealthEast’s original implant costs.

At St. Luke’s, average length of stay for hip implant patients has gone from 6.8 days to 5.5 since 1993; on knees, an even more dramatic drop, from 6.7 days to 4.6. (The industry average has been declining over the past twenty years, but is still closer to eight days for both hip and knee procedures.) Implant costs at St. Luke’s have also dropped significantly: from $3,400 to $2,700 for hips, $3,700 to $3,000 for knees.

Barbara Friedman, director of materials management at Long Island’s Winthrop University Hospital, has recently put in place a similar standardization program, built around Premier’s newly announced orthopedic implant contract, which seeks to standardize on five implant vendors: Wright Medical Technology Inc. , Intermedics Inc. a division of Sulzer Brothers Ltd. , Johnson & Johnson, Smith & Nephew Richards Inc., and Osteonics Inc., a division of Stryker Corp.

Having spent over $1 million a year buying implants from 11 different companies, usually at list price, Winthrop has been able to reduce implant costs by $350,000-400,000 per year through a process that brings surgeons and materials management together. “We were a sales rep’s dream,” she notes. “Most of the reps calling on our hospital didn’t even know where the materials management office was located.”

But programs to reduce implant costs are more sophisticated in their strategies—and thus have greater implications for suppliers—than simply trading lower prices for greater market share. Such programs are as likely to focus on using different kinds of products as on different brands. Thus, Winthrop officials point out that standardization reduced costs not just by increasing leverage with suppliers, but also by reducing the number of redundant and expensive implant systems used. Surgeon involvement is important not just in getting all to agree to use a smaller group of vendors, but, more to the point, in getting them to use less expensive technology.

HealthEast’s implant program was built on a hybrid approach: national GPO contracting, local standardization, and price ceilings on selected high-tech items. Thus it was able on its own to reduce the number of knee vendors to two (Johnson & Johnson and Wright, the latter accessed through an agreement Wright has with VHA North Central) and its hip suppliers to three (Howmedica Inc. , J&J, and Osteonics), and it has placed a $4,000 price ceiling on press fit implants.

And these three approaches don’t even include what is quickly emerging as many hospitals’ strategy of choice: changing implant mix toward lower cost products. Indeed, HealthEast took 10-20% of the cost out of its implant program just by changing product mix through patient demand matching, before vendor standardization was even broached.

Friendly Hills Healthcare Network of LaHabra, California has recently reduced the number of implant companies it works with to three and is about to move to a single vendor which, says Charles Brenner, MD, chair of the orthopedic surgery department at Friendly Hills, will create a kind of formulary, managing costs as much through product mix as price concessions. Under the new system, Friendly Hills will have one price per case to cover all supply costs. “Doctors willbe able to use high-end porous coated products,” says Brenner. “But the incentives in the system clearly call for the use of less expensive products.”

Just as importantly for product companies, the hospitals that offered first-hand testimony of their success in managing implant costs noted that aggressive management programs affect more than just vendor and product choice. Jack Lynch argues that one of the things that standardization will do at St. Luke’s is to reduce the need for high service levels from vendors, particularly in the form of having sales reps in the OR with surgeons during routine operations. “Two years ago, when we surveyed our surgeons, service was number two to them in importance behind product quality,” he says. “Today, it’s becoming less important.”

Entrenched Positions

Indeed, the growing complexity and full implications of the move toward reducing orthopedic costs is only now becoming clear. Two years ago, when Premier held its first Technology Futures Panel on orthopedics, the concepts presented, the solutions offered were so new, that they were greeted with a kind of enthusiastic innocence. Many hospitals weren’t even aware that they were losing money as Medicare reimbursement for total joint replacement dropped while costs were going up.

Dr. Avrum Froissom’s presentation on the success Mt. Sinai in Cleveland had had in reducing supply costs was fascinating because it was so new, so unique. More to the point, it was, at the same time, not threatening to anyone because so few of the constituents in the audience—especially surgeons and hospitals—had had time to consider the real world impact of the changes proposed. (See “Winds of Change in Orthopedic Implants,”IN VIVO, November 1992.)

The notion, in particular, of lowering supply costs by reducing the number of implant suppliers to the hospital was intriguing largely because it was so untested. And even some product suppliers tended to see what hospitals like Mt. Sinai were doing as more of an anomaly than as harbinger of larger pressures.

Two years later, the issues are much the same, but the mood is different. Managed care is now a reality for nearly everyone. William Tipton, EVP of the American Academy of Orthopedic Surgeons, noted that a recent survey of the Academy’s members found surgeons in 10 states—Arizona, California, Colorado, Washington DC, Delaware, Massachusetts, Minnesota, Oregon, Utah, and Washington—reported that more than 25% of their patients come from managed care plans. Anecdotally, managed care’s impact seems even greater. Said one surgeon, “I’d have thought 80% of my patients come from managed care.”

As the debate raised by managed care plays out, the position for each vested interest group becomes more entrenched. The central tension that ran through each of the speakers’ talks at this year’s Technology Futures Panel—that between cost and quality—is matched by an equally, if not more contentious debate: between the recognized need for all parties to work together to address the cost crunch and the desire, at the same time, to protect one’s own turf in a marketplace in which more is demanded and less is received. (Perhaps not surprisingly, the one perspective missing from the Premier program was that of a managed care organization [MCO] itself; Premier officials noted that they invited several prominent MCOs to speak but all declined, leaving the debate to surgeons, hospital administrators, and product companies.)

Implant companies, in particular, continue to feel the pressure. Said one manufacturer at the end of a lively first-day discussion, “All of the talk is still focusing on implant costs, as if that’s the only cost out of control. Everyone talks about partnerships but it sometimes seems as if the only thing partnering with vendors means to [hospitals and surgeons] is getting more and more concessions.”

A Growing Commoditization

The irony is that orthopedics, whose dramatic growth for both suppliers and providers was made possible by technological innovation such as implants and arthroscopy, has now turned with a vengeance on that technology.

In an effort to reduce costs, providers and payers have stripped technology of much of its value and nearly all of the leverage product suppliers enjoyed, by increasingly viewing products as commodities. Indeed, the commoditization of technology, particularly implants, was a recurrent theme of the program. Typical was Avrum Froissom’s response to the question of whether there is any real difference between the various products available in the marketplace: “At the very highest end, there aresome specialty items that we really need for certain cases,” he noted. “But for 80-90% of the cases, the products of one manufacturer are so comparable to those of another, we really can’t tell any difference.”

Behind the growing sense of commoditization lies a creeping conservatism in product selection, characterized particularly by skepticism about the value of new technology. Stan Mendenhall, publisher of Orthopedic Network News, noted that concerns about cost and increasing demands by patients and surgeons for long-term outcome studies on implants are encouraging what he called a “back to basics” approach to implant selection: Why use new, untested products for which we don’t have any data to confirm that they work when we can use older products which we’ve proven work?

A Leveling of Care

Implant companies aren’t the only ones feeling the loss of leverage, the determined leveling of their value implicit in the trend toward commoditization and conservatism. Indeed, everyonein the industry, including surgeons and hospital administrators, seems to feel the implicit commoditization of their services that is a fundamental tactic of managed care: offer us a lower price or we’ll go somewhere else.

Thus, Dr. Lawrance Pollack of Sharp Rees Staley Medical Group noted that high on surgeons’ anxiety list these days were questions such as, Where will my patients come from? Will I have any work to do? What will I be paid? (In San Diego, according to one industry executive, orthopedic surgeons from eight different groups are scrambling to restart their practices after having been virtually stripped of all patients because they refused to contract with local MCOs.)

It isn’t just a leveling process, a driving down of value to reduce costs. Behind the debate between cost and quality lies another, more serious dilemma for both suppliers and providers: what happens when customers say they want one thing, but consistently expect another? Surgeons and hospitals feel this most acutely. Mt. Sinai’s Froissum spoke of the challenge for surgeons in dealing with patients who want high quality and complete freedom of access but also want low costs. As one surgeon in the audience put it, “High quality care is expensive, and somebody has to pay for it.”

Who Will Pay?

Managed care is already having an impact on the number of orthopedic procedures performed, not merely on the cost of each procedure. Overall demand has slowed and may have, in fact, peaked. Anecdotally, industry observers argue that procedures on the “bubble”—i.e., those which would have been done without a second thought a couple of years ago but have less than compelling clinical justification—are no longer being done because of surgeons’ fears that MCOs won’t pay for them.

But managed care’s real challenge is that, despite this slowdown, all signs point to an increasingly strong demand for orthopedic services over the next couple of years, due to an aging population, while resources remain constrained. The number of people over the age of 85, high users of orthopedic services, is 3 million today; 30 years from now, that number will increase five-fold. William Tipton noted that if current aging rates continue, last year’s total hip volume of 280,000 will balloon to over 500,000 per year by 2030. Advances in osteoporosis and arthritis can help prevent some future demand, but a population that is getting older every year will inevitably demand more care. And we haven’t even begun to see the impact of the current baby boomer generation entering its senior years.

Moreover, even as much of the discussion turned to ways to reduce current program costs, several speakers noted the implications for providers of new procedures and technologies to treat orthopedic programs in the future. Indeed Tipton argues that orthopedics is in the midst of a transition from biomechanics to biotechnology. New therapeutic agents, such as growth factors and bone morphogenetic proteins, will radically change treatment protocols and perhaps even make some surgeries obsolete.

But such new approaches come with high price tags. Will payers and patients, given the clear efficacy of these agents, pay for the increase in technology and demand? Some attendees of the Premier panel spoke of the need to put more of the participants of the system at risk, including patients, so that the additional costs are borne by all. Still, the notion of spreading risk suggests that in the short term, much of the debate in cutting costs will focus on who will bear the brunt of the cost and service reductions in an environment in which everyone is being asked to do more for less.

Thus implant suppliers at the conference were asked to lower their costs by reducing the role of the sales rep or by eliminating high distributor margins. But getting customers to agree on the necessity of such service cutbacks is one thing in a debate about managed care and quite another in the marketplace itself. Said one manufacturer, “Despite all the talk about needing lower service levels, I don’t see our reps doing less for their customers. In fact, with a lot of hospitals cutting back on OR staff, our reps are being asked to do more, particularly in setting up the instrumentation and making sure everything’s ready to go.” Other suppliers pointed out that eliminating distributors from the system wouldn’t necessarily reduce costs, since many of the costs borne by distributors such as the purchase and free loan of instrumentation, would be pushed back elsewhere into the system.

Suppliers face the same dilemma in suggestions that they can cut costs by simplifying instrumentation so that OR time could be reduced and productivity improved. Said one manufacturer: “It’s not like we set out purposely to make instruments difficult to use.” There is, of course, a degree of disingenuousness in such rationalizations by manufacturers—the service levels sales reps provide are very expensive and distributor margins are extremely high and increasingly unaffordable in the new environment.

But many of the solutions to the current cost problems will require actions that until now—and perhaps even still—have been riskier and harder to do than some players will find acceptable.

Disciplining or refusing surgical privileges to doctors whose costs are too high is a good example. While increased data collection will give administrators the tools with which to confront renegade doctors, one attendee noted, “There isn’t an administrator in this country who will, by himself, fire a physician.” And John Weir, administrative director of the Bone and Joint Center of McLaren Health Care Corp. of Flint, MI, noted that while better studies will make demand matching a valuable tool in keeping supply costs in check, “that’s not something I see the administrator enforcing. It’s really a decision for surgeons and their patients.”

A Trend Toward Partnerships

For manufacturers, the issue is one not so much of will but of risk: how, for example, do you make wholesale changes in distribution and sales and marketing practices when some of your customers are demanding change, while many want to continue to do business as they have for years?

Indeed, calls on implant companies to drive product prices lower by reducing distributor margins or to eliminate distributors altogether presents a dilemma to manufacturers that know that most distributors still play a key role in holding important accounts. Many hospitals and surgeons that speak of the need to drive down costs generally, note personally the importance they place on relationships with their local suppliers—the supplier’s equivalent of the dilemma of the patient who asks for one thing and expects another.

Premier finds that balancing the needs of its hospital constituents and its vendor partners places it squarely in the middle of the debate. Said one manufacturer, “We already made a major contribution to addressing the cost issue when we signed our Premier contract [i.e., offered the price discounts Premier was asking for]. I thought we were going to come to this program to see how we could work together, not to hear more complaints that supply costs are still too high.”

And certainly partnership and partnering were an important theme of the conference. Connie Woodburn, Premier EVP, summing up the first day’s program, noted that implant costs shouldn’tbe the sole focus in reducing costs. And she stressed the need to have everyone work together. “This is something that can’t be done alone. We’re going to see more and different kinds of alliances: hospital/surgeon, payer/provider, supplier/hospital.” Added one surgeon, “What once would have seemed like an unholy alliance will, in the future, seem like a great match.”

St. Luke’s Jack Lynch agreed, “We can’t make implant costs and demand matching the focus of our [savings efforts]. We need to have surgeons directly involved and everyone working together as a team.” But that’s precisely the point. If St. Luke’s is a model of how effective partnerships can be when everyone works together, it also underscores that not all partnerships will be smooth. In the meantime, there will be much jockeying for position, much staking of ground to make certain that the concessions don’t come disproportionately from one group.

Implant companies, because they are a logical and, in some respects, easy target, feel the pressure acutely. But they’re hardly alone. Alan Korn, MD, SVP, Medical Affairs, for Premier, noted a fundamental conflict between the need and desire of MCOs to reward selected surgeon and physician partners with more patients, both to channel patients to more efficient providers and to reward them for price concessions made, and the desire by surgeons and hospitals, for both economic and clinical reasons, to retain their current patient base under the banner of continuity of care.

The issue is that managed care isn’t simply about reducing costs; it’s also a zero-sum game where one side’s gains come at the expense of another, where one party wins only when someone else loses. Programs like St. Luke’s show clearly that teamwork is valuable, perhaps the only way to make any real progress toward reducing system costs. But the irony is that as managed care becomes more widely accepted, consensus and partnership become moredifficult, not less, as each side tries to protect its turf.

Redefining Suppliers' Value

For product companies in particular, managed care is unsettling precisely because it forces them to redefine, and prove, the value they bring to the new environment, since much of the focus of cost savings efforts is on implant costs. Indeed, lower pricing and unit costs on implants remain much easier for hospitals to grasp in the face of attempts by suppliers to define savings differently, just as lower hospital costs and physicians’ fees are easier for most MCOs to appreciate.

Thus, the market leader implant companies that are not participating in the Premier contract all argued that Premier hospitals would benefit more from the smaller price concessions they offered than from the contract as it currently stands (i.e., deeper discounts from non-market leaders) because their larger market shares would result in greater overall cost savings to Premier hospitals immediately. They’re right—but only if the Premier contract doesn’t move market share to its five participating suppliers. And so the question becomes, Who, in the new environment, controls market share?

The debate hits at a second reason why product suppliers find the new environment so unsettling. The change in strategic direction implicit in managed care represents a major cultural change for most companies. Even as they repeat the well-rehearsed justifications forhigh implant costs and against standardization, they know intellectually that the market is changing and that it’s time to change with it. But grasping that truth emotionally is still difficult. Thus while company executives know that standardization programs carry an implicit reward—i.e., increased market share—most find it difficult to concede price discounts to customers before proof of market share shifts is given. That’s why new contracts such as Premier’s are being watched so closely, both by those implant companies that are in the program and those that chose not to participate.

But beyond such emotional issues, the new cost-constrained environment represents an especial challenge to orthopedic suppliers: once you acknowledge that life as you knew it is changing, what do you do about it? The decision whether to go along with what seems to be a growing trend toward national contracting—witness Premier’s agreement and the much anticipated program about to be released by Columbia/HCA—has emerged as a pressing challenge for most implant companies. But volume-driven, GPO-like contracting is clearly only one, and perhaps not even the best, way for hospitals to deal with rising implant costs.

Setting The Therapeutic Agenda

Indeed, manufacturers face an ever more complex environment in which to sell their products. GPO contracting, local standardization, price ceilings, and changing product mix all pose different issues for product companies and call for different strategic responses. For example, if GPO contracting becomes widely accepted, both pricing and distribution strategies become centralized on a national level and call for changes in the current distribution structure. But if much of the standardization is done at a local hospital level, pricing and distribution will remain local decisions, and any strategy that calls for eliminating current distributors is deadly.

Managing in a market which is likely to include several different initiatives rather than clear choices is doubly tricky. But beyond this, the challenge for orthopedic companies is to broaden their scope without losing their focus. Pharmaceutical companies that have responded to managed care by embracing pharmacy benefit management or disease management have done so from one motivation: the realization that in the new environment, if they are merely sellers of products, they’ll never regain any leverage.

Instead, pharmaceutical companies today are engaged in a turf battle to see to what degree they can participate in setting the new therapeutic agenda demanded by their customers, whether through pharmacy benefit management, disease management, or the pioneering of altogether new ways of treating diseases. For orthopedic companies, as for suppliers of other physician-preferred high-tech devices, the challenge is to similarly participate in setting the therapeutic agenda with surgeons and hospitals that are, publicly at least, calling for new partnerships.

Phrased differently, the challenge for both suppliers and providers is to open the doors of the new partnerships to allow suppliers to participate as equals, not simply as vendors of products—commoditized, highly leverageable and therefore interchangeable, if one-sided concessions aren’t granted by those suppliers. The initiatives many implant companies are launching in areas such as capitation and outcomes studies are a start, but they will have to be viewed credibly by customers and not perceived simply as a way of dodging price pressures. If they aren’t, then the only role product companies will have in such partnerships will be to continue to give ground.—DC

Consolidation in Orthopedics: If not now, when?

As more hospitals adopt standardization programs to reduce the number of implant suppliers, and as more large hospital alliances and systems move toward national contracting for implants, there is a growing sense among industry executives that the US orthopedic implant industry is poised for dramatic consolidation. A marketplace that increasingly treats implants as interchangeable commodities, the argument goes, will be able to accommodate five or six major suppliers, but not the dozen or so who currently market their products on a national level.

Certainly in other industry segments, cost pressures and large buyers have reduced many markets to oligopolies, dramatically shrinking the number of viable suppliers. In med/surg hospital supply, most product segments are dominated by two vendors, while even in pharmaceuticals, the recent crunch of managed care has driven a wave of consolidation. (For a slightly different take on the drug industry’s recent acquisition activity, see “From Newton to Heisenberg: The New Physics of the Pharmaceutical Industry,”IN VIVO, February 1995.)

But while there is much talk of the likelihood for consolidation in orthopedics, there seems to be little real movement toward it. Of the major acquisitions among implant companies last year, only Wright’s acquisition of Orthomet seemed to herald a wave of consolidation: a small company that had made a promising start toward joining the top ranks of suppliers gives up when it realizes it’s not going to get there alone.

Forget Biomet’s acquisition of Kirschner: Kirschner wasn’t going anywhere on its own. That deal represented more of an opportunistic cherry picking, started ironically by Orthomet, of a company that needed to be acquired. But where is the next wave of acquisitions and consolidations likely to come from? And why is a consolidation which seems inevitable taking so long?

Part of the reason has to do with the fact that while consolidation seems logical from a strategic standpoint, the economics of consolidation, or more to the point, the economics of selling out, are less compelling. For all of the cost and price pressures of the last several years, the implant business is still a strong cash generator, a fact not lost on the large parent companies, including pharmaceutical giants such as Pfizer and BMS, who own the leading orthopedic companies. Indeed, of the top dozen implant companies, only two, Biomet and Wright Medical, aren’t owned by larger parents who are likely to see any deal to sell their orthopedic businesses in economic not strategic terms: i.e., can they get the return they need to offset the cash such businesses now generate.

For others, such as Stryker (Osteonics) and SulzerMedica (Intermedics), orthopedics, despite the price pressures, are still part of a larger medical device strategy. Dramatic losses of market share, prompted by a greater movement toward national contracting, could accelerate a trend toward consolidation; so , too, would precipitous price drops driven by this trend, particularly if both resulted in taking much of the profitability out of the business for the implant companies’ parents.

Premier’s recent agreement with five orthopedic companies will be closely watched, as will Columbia/HCA’s agreement, about to be announced, which reportedly will choose among DePuy, Howmedica, J&J and Richards, to offer its hospitals two suppliers for hips and two for knees. But such contracting will not only have to be followed by similar attempts at contracting by other large national alliances and systems,—the number of significant national implant contracts can still be counted on one hand. GPOs will also have to prove they can actually move market share. Even the Columbia/HCA agreement reportedly allows for significant regional and local contacting, allowing implant companies not on the list to aggressively pursue Columbia’s hospitals through very traditional sales and marketing approaches.

For all the cost and price pressures implant companies find themselves under today, until dramatic market share shifts and declining profitability makes orthopedics a significantly less profitable business than it now is, consolidation seems likely to take a while to get here.