Big orthopedic settlement could swing pricing pendulum toward hospitals.

Probably for as long as surgeons have implanted artificial hips and knees, manufacturers enjoyed the enviable position of being able to set prices. Unable to fall back to the relative safety net of group purchasing contracts and finding themselves compelled to cede to surgeons’ demands for their implant product and supplier of choice, hospitals had little alternative but to pay for the implant, very often at list price. Since such orthopedic procedures can amount to their financial lifeblood, few hospitals can risk losing a skilled, high-volume orthopedic surgeon to a competing facility should that surgeon become displeased with product selection pressure. The scenario heavily favored the major orthopedic implant producers, which rode the wave of weak opposition for decades. But suppliers may have pushed the envelope too far when they enlisted the help of and paid millions of dollars to legions of consultants, who in reality were the very surgeons to whom they were selling, to keep the flow of favored hip and knee implants moving. This ultimately flawed arrangement allowed vendors to walk past the materials management office and bask in the sunlight of a generous price structure. It’s no surprise that since the early 1990s, as hospitals bought hip and knee implants on a cost-plus basis, it was said that the sales reps drove the best cars in the parking lot. But now, since a historic settlement in fall 2007 between five major implant manufacturers and the federal government, the Wild West that has categorized sales tactics and purchasing practices for a multitude of hip and knee implants has been tamed a bit. Nearly one year later, the tempestuous hip and knee market has been sedated as outside monitors have moved in to help ensure compliance to more justifiable business practices. Three of the manufacturers involved in the pivotal settlement were Biomet, Zimmer, and DePuy Orthopaedics, a unit of Johnson and Johnson, all based in Warsaw, IN. The remaining two are Memphis-based Smith & Nephew, a British-owned company, and Stryker Corp. in Kalamazoo, MI. Stryker cooperated early in the investigation and was not fined. Each company reached civil settlements with the U.S. Department of Justice and U.S. Department of Health and Human Services, Office of Inspector General (OIG), under which they agreed to pay a total of $311 million to settle government claims under the anti-kickback statute and the civil federal False Claims Act. Specifically, Zimmer paid $169.5 million, DePuy paid $84.7 million, Smith & Nephew paid $28.9 million, and Biomet paid “ We still are in the Wild West, but it is settling down a bit.” —Scott Crandall