One of the areas of increasing scrutiny within the medtech world in recent months has been the recognition that the selling expense, often masked within a company’s SG&A (selling, general and administrative expense), is higher within medtech than most other industries.
Orthopedic product manufacturers are often at or near the top of the list, in terms of SG&A as a percentage of sales. It has been a long tradition in orthopedics for the sales force to have a tight relationship with the implanting physician (typically an orthopedic surgeon of one flavor or another), as well as the medical support staff. In some cases, this has gone to the extreme … we’ll save that for another post. Suffice it to say that over time, the physician tends to “buy the rep” more than “buy the brand.” In fact, among medical device sectors, the orthopedics sector is perhaps the most striking example of this phenomenon (followed closely by those in the cardiac rhythm management sector). This influences a number of commercial operating mechanisms and decisions the manufacturer makes. You can see one such impact on the incentive compensation practices by taking a brief interlude over to this post.
By and large, these relationships are not just “for relationships’ sake.” The salespeople often add tremendous value through a combination of having quick access to a wide array of shapes and sizes of the products, as well as adding clinical value by having built up a plethora of surgical experience. They don’t actually touch the patient, but they do often advise the surgeon on techniques and share best practices from other neighboring surgeons.
The influence of the orthopedic salesperson has become so strong that many of them became mercenaries—independent distributors. In fact, throughout most of the past 10-plus years, the orthopedic sales forces have been predominantly designed to use this well-entrenched network of independent distributors. Manufacturers set up sales agreements with these distributors to represent or sell their products within a specified geographic territory.
There is, of course, a cost to the services that the sales force, whether employed or independent, provides. That cost has traditionally been buried in the price of the products that the reps carry. Hospitals and IDNs (integrated delivery networks) have recently begun pushing back on the presence of the representatives in the operating theater. The reasoning is not only for cost reduction, but also liability and infection control. These pressures are not likely to go away. In fact, there are some orthopedic manufacturers that are going down the path of a rep-less model either as an option or as a primary business model.
Now orthopedic manufacturers are in a bit of a bind. On one hand, they have a relatively commoditized product line, with a surgical user base that buys the rep relationship more than the brand itself. On the other hand, they have a hospital payer that is seeking price transparency and the ability to control costs, as well as other risks such as infections. Within hospitals, when challenged by management, surgeons have traditionally been able to flex their muscles to achieve the outcomes they are seeking. However, recent increased cost pressures, as well as the trend toward surgeons becoming employees of the hospitals themselves, have shifted the power toward the economic interests.
So what are they to do? The two sides are digging in their heels in some places. In others, the economic and clinical stakeholders are jointly attempting to solve the issue, first by simply sitting down together to share their individual points of view, as well as some data related to the challenge itself.
The downside for orthopedic manufacturers is that they are not likely to be invited to those conversations, and by being locked out, they will ultimately not be a part of the solution. A better stance would be for the manufacturers to get out in front of it, and to propose a solution that is amicable to both sides of the debate.
The solution could come in different forms, and will almost certainly involve a variety of offerings. For example, perhaps the manufacturer will offer a service contract that would specify the degree of service desired, which could range from “be here for every case” to “don’t call us, we’ll call you,” and have many variations in between.
There will be certain customer segments that want to stick with the current high-service model, and they can receive that model with a similar overall price as they are currently paying, but this price may now explicitly include the two components: product and service. Other customer segments will want to move toward a lower overall cost model, which would imply reducing or removing the service component, and paying only for the widget itself, at a significantly lower price than is currently paid. This sort of system will better meet the needs of that segment, and will line up the value with the cost for the various offerings.
There may be downstream consequences for those who choose to forgo the service component—hospital technicians will need to take over some of the role of the rep, also some of the surgeons will need to up-skill, now that one of their crutches will be missing. As a whole, this transition will have its growing pains, like any other, and if done strategically, should allow the big players to continue their dominant market position, ultimately providing better products and services to their orthopedic customers. There is still a lot to be determined, including the basket of valuable offerings for each segment.