Tuesday, December 22, 2009

Surgeon Owned Distributorships: New Trend or Passing Phase?

TSB has learned that a new academic program is being added to the syllabus in medical schools and fellowship programs across the United States. It is called the SOD or Surgeon Owned Distributorship program. It's an attempt to bolster the spine surgeons ability to increase their earning capacity. This program could become part of the standard core curriculum, integrated into a dual M.D./MBA degree program. If approved, many medical schools that are affiliated with universities having law schools intend on offering classes on how to navigate the legalities of this business model so that the surgeon is in compliance with Stark and CMS guidelines. In response to this program, many Deans have reported that they intend on eliminating their course on medical ethics.

Why is this business model picking up momentum at a time when the government is scrutinizing healthcare, let alone the spine industry? The reader can only surmise that the old adage applies; when one door closes, another door opens up. Ten plus years ago as surgeon consulting agreement were picking up momentum, law firms started sending promotional flyers on legal seminars that addressed how to comply with Stark I and II in managing your agreements. These seminars do exist, run by the same profession that surgeons love to complain about, the legal profession. Today consulting agreements have become so rampant that it has become commonplace to broker a surgeon before they have even tried a new product. As sham consulting agreements have become prevalent, ever so more scrutinized by the DOJ's microscope, a different business model is starting to emerge. The surgeon owned distributorship.


Rumors have surfaced that this model has picked up momentum, especially on the West Coast. One of the most important aspects of starting a surgeon run distributorship is to receive legal clearance that what you intend on doing, and how you intend on doing it is within the law. The surgeon investor is looking for a legal opinion to assure that there is no inherent conflict of interest. In all likelihood, the surgeon's role in this business model is usually as a silent partner funding the distributorship, that is run by a non-surgeon. It helps if you have a three to six man group that has a high volume surgical practice because that would produce immediate volume. So the question must be posed, how desperate have some of these surgeons become?

Over the last ten to fifteen years, the medical device industry has used every legal advantage to stretch the rule of law and get an advantage on the competition. This behavior threatens the core of free-market enterprise. Starting around 1991, the evolution of the surgeon has gone through multiple phases, those include; surgeon educator (let's have them teach our sales reps and the residents about surgical technique at company sponsored meetings), surgeon marketeer (let's fund a controlled study to emphasize the efficacy of our product), surgeon consultant (let's hire the surgeon as consultant based on volume), surgeon designer (let's buy their IP), surgeon owner (let's invest in a start-up company and maybe we'll hit the lottery), surgeon owned specialty hospitals (let's profile our patient selection and we'll show the government on how to run healthcare), surgeon investment banker (let's go work for a private equity firm), and last but not least, surgeon owned distributorships. It's a wonder that some surgeons even know how to operate? Could it be that all that is left for spine surgeons is to become salespeople. But doesn't that already exist?

It is debatable as to whether Stark I and II are truly an unwarranted intrusion into the practice of medicine when we deal with the above stated scenarios on a daily basis in our business. Many surgeons including NASS respond to these concerns by stating that while these problems exist, they are not widespread. Of course every parent wants to believe that their children are behaving. If you have invested or own a hospital, company, or distributorship and are a surgeon could this not constitute a potential conflict of interest? Sometimes you have to wonder whether some people would just focus on what they were trained best to do and let others do their job. TSB wants to know what our readers have heard?

34 comments:

  1. If surgical volume jumps by 30% the month after the distributorship opens, then the ownership is clearly affecting the judgment of the surgeon. The question is, if surgeon ownership of the hospital and distributorship, as well as the pizza purchased by the local spine rep are all disclosed to the patient in a clear manner, how do we know if the arrangement is abusive? Any surgeon will tell you that their outcomes and personal sanity will improve if everyone in the OR (minus the patient) is a direct employee of that surgeon.

    You fail to mention the potential benefits that are possible from such an arrangement. I am aware of two such surgeon owned ambulatory surgery centers that also own a distributorship that sells to the ASC. The arrangement is a bit less formal than what you describe. Even after the markup, both of them are Blue Cross/Shield centers of excellence because spine procedures are done at 50% of the cost of the local private hospital.

    “In response to this program, many Deans have reported that they intend on eliminating their course on medical ethics.” Is this true or is this TSB wondering if anyone will catch it, I call BS.

    "Sometimes you have to wonder whether some people would just focus on what they were trained best to do and let others do their job." Says the hospital executive whose annual salary is twice that of the surgeon. This statement could also be muttered by the Venture Capitalist whose revenue model and exit strategy assume a $7k ASP for a PEEK cage.

    Stated by a surgeon who has made a career out of the arrangements you mentioned, "the A students are supporting the industry while the C students are driving the industry", (you won’t need three guesses…)

    Since TSB is a lover of lyrics, as Ice-T says, “Don’t hate the player, hate the game”

    By no means do I believe that all surgeons are angels, but to imply that any surgeon attempt at entrepreneurialism is desperate or devious, is an opinion that is jumping the gun at best, and anti-American at worst.

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  2. Of course anyone that questions the ethics of a surgeon and the potential of violating Stark must be a card carrying communist. Hey doc, if you're complaining that others make more money than you and take less risk, its America, quit your job and become a hospital administrator, venture capitalist or better yet, your plumber. I'm sure you would get use to having one less Porsche in your driveway.

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  3. And in all these discussions the one fact that is never mentioned is that the original motivation of going to med school in the (distant?) past was not to get rich, but a desire to help fellow humans. In no other country is youthful idealism so quickly replaced by hard calculation. Just look at what the most popular specialty is to get into today: dermatology, because it pays extremely well, allows you to do all kinds of cosmetic (hello Ca$h!) procedures on the side, and you are never on call. In the old days, a good doctor rarely was well to do, but he certainly was well respected. Something else that has been lost along the way, especially in spine.

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  4. History Buff, very very true. Only 25 years ago, Dermatology was severely at the bottom of the heap of specialties that graduates of med schools wanted to pursue. Yet with the 9-5 hours and high pay it is among the top choices of graduates for specialization. Add to that the severe decrease in docs wanting to specialize in obstetrics. Why? Hours....lower pay.... high insurance premiums. Lost along the way indeed.

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  5. The surgeon owned distributorship/company model is quickly gaining traction. I have been in the business 10 years and this is the biggest threat to the spine companies. These docs are starting to recruit other docs with income projection models based on volume. I just have to wonder if the patients know the rational for the implants they use. One group I know of, won't use their own products on medicare patients. Wonder why?? The longer it goes the more guys are signing up to these deals. They have lost their ass in real estate and stocks and gotta find a way to replace it. Just an opinion.

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  6. Anyone that builds a business on the SOD model will find themselves in a serious quandary once it is legislated out of existence as an option. What will probably happen is that these businesses will continue in violation of whatever new rules are imposed. Seems that many of the participants in such schemes have a fundamental inability to say "No" if there is a dollar to be had.

    I think building ANY business on a questionable tactic is doomed to fail in the long run. It seems to me that there is a serious lack of inductive and deductive reasoning in this industry. There is little, if any, attention to reading trends and adjusting accordingly.

    With the sunshine act and other new rules and regs ccnstantly being looked at, why on earth would anyone want to try and build their business on the shifting sands of legislative loopholes?

    It smacks of laziness and a general overall lack of business acumen.

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  7. We have a SOD in the isolated market I operate in. I am shocked at how brazen the surgeons are regarding the ethics involved. They essentially thumb their noses at everyone. Their unified comments sum up to basically, "why should the reps make all the money". I wonder if they tell their patients what they're up to.

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  8. I wonder how many distributors/reps that have lost business to these SODs have become whistleblowers? If so, they better hope that the community never finds out they contacted the DOJ.

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  9. It is never the wrong thing to do the right thing.

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  10. Based on the initial comment, it seems that there are surgeons that exhibit a sense of entitlement. When the patient cries out, God don't let me die, their talking to God the Father, not God the Surgeon. You gotta love whenever some surgeons claims if everyone in the OR was a direct employee of theirs the outcomes would be better. Now the staff is responsible for someone's crappy patient profiling, or the poor surgical technique. Maybe if y'all spent as much time managing your business as you do talking to your stock brokers y'all would be better businessmen.

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  11. A jaded view, but is it far from the truth?

    In the old days, a surgeon talked to his patient, did a thorough physical exam, if necessary selectively ordered tests, arrived at a diagnosis, determined the best treatment to cure the ailment, and if that happened to be a surgical procedure, he went ahead and performed the surgery. While in the OR, he was the captain of the ship, and the staff, who were not his employees, had to follow his directions. Only the anaesthesiologist was allowed to interrupt in case the vital signs of the patient necessitated it. Where appropriate, the surgeon would use implants, of which there were a limited number available at reasonable cost (certainly pre-FDA), and in which he had no direct financial interest, even if he had helped develop them. Post-operative follow-up was done by the surgeon himself and again involved spending time and talking with the patient.

    Today, the PA talks relatively briefly to the patient, does a quick exam, orders a battery of often expensive tests, and after a brief consultation with his boss schedules surgery, sometimes even when non-surgical options still could be considered. The day of surgery the surgeon briefly introduces himself to the patient, the resident and PA start the surgery and the surgeon comes in to implant very expensive hard- and software in which more likely than not he has some financial interest. Next to the necessary staff, the OR often is populated by individuals who want their wares used, so that they can earn a commission. On occasion there may be 15 people in an OR where only one patient is being operated upon..... The patient is lucky if during follow-up he sees the surgeon himself more than once. If the outcome of the surgery is not as the patient expected, the reasons given are the patient's psyche or life style, fibromyalgia, RSD, sacro-iliac dysfunction, or failure of the implants, but rarely the admission that the diagnosis or the type of surgery performed may have been wrong. That possibility will be suggested by the next surgeon the patient consults, and the whole circus may begin again.

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  12. Talking Meds, I find it a very common source of frustration from surgeons that someone else may make more money than them (Gasp!) Where is it written that surgeons have to be paid the most money? The administrator of a hospital operates a massive businees, with multiple divisions, thousands of employees and his decisions have a far greater weight on his shoulders to be profitable than any surgeon. (By the way, I am not an administrator, but it irks me to hear surgeons say things like this). I am a distributor and I will tell you that there are reps that make more than the average surgeon, but it is rare. Spine surgeons are very handsomely paid, even though most of them have never had to manage any portion of their business themselves, never had to market themselves, and for the most part have no idea how to run a business.

    Concerning the POD's, none of them comply with a particular safe harbor that states that the POD must market their products in the same manner to investing surgeons as non-investing surgeons. That is impossible to do. You bring a pro-forma to one doc and a sales brochure and a sample implant to the other.

    Another thing to consider, entrepreneurialism is all fine and dandy, as long as the surgeon stays out of the business of selling products to himself (directly or indirectly) because you are human and it will influence your decision making. I would bet the farm that the docs you know in that POD arrangement had many reps show them many good products that they never switched to because of their comfort level with the product they were currently using and they probably had a rep that they trusted that always had what they needed and helped them out of many binds in the OR. When they signed the POD deal, how long did it take them to throw those values out the window and switch to the POD products? What are the chances that the POD products were better than what they were previously using. What are the chances that they no longer have a rep that is knowledgeable and conscientious? I would even bet that the POD products are not significantly less expensive.

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  13. Thanks for the helpful information. Hope to hear more from you.
    add your website in

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  14. interesting points, SPINE DISTRIBUTOR... can you honestly sit there and claim that your ASTM-compliant pedicle screw is superior to the next company's ASTM-compliant pedicle screw? how about comparable--which is why these standards were adopted. the only thing that sets companies apart from one another is the packages they are willing to offer surgeons based on production! and as a distributor, you are even less subject to the corporate AVMED-compliance standards that have been adopted by almost every major company to throw the DOJ off the scent... so how was your last golf junket to ireland with your top-producing surgeon? you also referred to companies and reps that surgeons have long trusted to bail them out in the OR... i have not once, in 10 years of practice, had a company contact a patient regarding a broken pedicle screw or rod. and every rep that sees hardware failure in the OR has "never seen anything like that before". so one of the reasons that PODs will be so successful, is that since the companies insist on shifting the liability for failures to the surgeon, the surgeon will now be SOLELY responsible for his/her outcomes, both medicolegally and monetarily. additionally, in the area of business practices, name me one other profession besides medicine that is not allowed under the current tax code to write off bad debt (for services rendered to uninsured patients that are given the same medical care that your family enjoys)...

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  15. In complete agreement,Anonymous. Spine Distributor's comments seem like a whole lot of sour grapes in an industry that is finally righting itself from the burdens of the handsomely paid middleman. In fact, spine distributorships in their current form, more often than not, represent the unnecessary"fat" in the system. They are often given 20-35% off the top for providing (not manufacturing) expensive hardware. This is a percentage that ALL manufacturers would like to see go by the wayside as more efficient distribution models are developed. Hospitals have also been strong advocates of the SOD model because of years of being gouged by distributors in their current form. It seems that the SOD model benefits everybody truly invested in the care of the patient (the surgeon, hospital, and manufacturer), but not the current distributor.

    The fact of the matter is that the current distribution model is inefficient and cumbersome. Literature exists that the SOD model saves costs for the insurer, hospital and manufacturer. The implication that running a distributorship requires any type of business acumen is not to be taken seriously. Many individuals in this line of work are individuals in secondary positions in healthcare (scrub techs, PAs, nurses) who have found a better opportunity as a result of their relationships with certain surgeons. Why should surgeons not be able to exploit the same opportunity?

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  16. these companies are growing, not falling by the wayside. they are more aggressive than ever. as long as they dodge advamed, the big companies will suffer. goliath goes down.

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  17. Wow, last comments are obviously from the surgeon owners of Alliance Surgical.
    Their comments come off very arrogant and bitter toward the medical device distributors. It obvious they are very bitter that anyone but themselves could possibly carve out a decent financial existence, so they found a way to make as much money or more as any medical device distributor in the market. It seems they will try to convince unsuspecting surgeons (In the near future you will be prosecuted by the DOJ) into entering long term, binding agreements with them to "manage" their distributorships. In return Alliance Surgical will handle all the leg work to ensure that their "distributorship" is managed efficiently and legally for a "nominal" fee. They will also help select the medical device company the best meets the need of the surgeon group that contracts with them. I'm sure they also receive a "nominal" fee from the medical device company for facilitating this arrangement.
    The Anti-Trust laws will eventually catch up with all these money motivated individuals and the long term effects will be devastating.
    Don't be naive or greedy. As a patient it scares me to death that a surgeon would be motivated my his reimbursements as to which device he decides to put in me. Didn't a heart surgeon in Redding recently undergo criminal prosecution for performing unnecessary procedures that were money motivated? Didn't the DOJ recently prosecute the medical device companies for illegally enticing/influencing surgeons with monetary "kick-backs" and illegal "consulting agreements"? How does a Surgeon Owned Distributorship differ? Isn't it obvious to everyone involved that the surgeon's decision as to what to implant is best for their patient will be influenced by the fact that they do or do not have a financial interest interest in the medical devices being offered?

    A comment above suggested that if a implant is ASTM-compliant then its just as good as any other ASTM-compliant product. This is simply not true. In my research data suggests that any product that meets basic requirements can be ASTM-compliant but that the device design and manufacturing process can and does vary widely between manufacturing companies. One implant being better than another plays a critical role in determining the post op satisfaction that a patient experiences as well as the longevity of the implant in a particular patient. Especially in regards to the varying activity levels and special considerations that vary among prospective patients. If all "compliant" implants were equal wouldn't the various registries show similar results among manufactures? They don't, the medical device registries in various countries suggest that certain implants do better than others simply because of variances in design and manufacturing.
    It seem to me the founder and purveyors of Alliance Surgical and companies like them are simply hypocrites. They are capitalists attempting to make a buck and attempting to destroy their competition through propaganda. Not unlike a lot of other unscrupulous capitalists in America.
    Whatever it takes, right?

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  18. Wow.....that last comment is clearly from a current distributor rightly fearing for his existance. I am a surgeon who has nothing to do with Alliance Surgical who has recently done a significant amount of legal research and helped to set up two successful, surgeon-owned distributorships in the Midwest.

    Your comment about the DOJ couldn't be more off base. In fact, the DOJ and the OIG have given every indication that they support the idea because prior experience with physician owned companies (eg. surgery centers) has proven that care can be streamlined, and significant cost savings can be realized without compromise of quality. This sentiment will only become stronger with the inevitable endorsement of NASS and CNS.

    Finally, we are all aware of manufacturer-specific data which indicates that their product is superior in every way to everything else. Manufacturing registries from other countries is probably the worst evidence you could quote. While our FDA certainly has its faults, it does ensure the excellent overall quality of everything 510K approved in the US.

    Maybe its time to consider placing yourself in a position where you are more necessary.

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  19. Sounds like you spoke too soon. The OIG just won a 7.3 mil dollar settlement against a POD two days after your post. I would rethink your logic and stick to practicing medicine. “This settlement sends a strong message that companies, including those with physician-owners, cannot use federal health care beneficiary referrals to line their pockets by securing business from hospitals or other providers….We continue to have serious kickback concerns when companies link investment opportunities to the ability to generate business and offer returns on investment that are disproportionate to business risk.”

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  20. You are such an idiot! Read the settlement again. This blogsite is SPINEblogger, not LITHOTRIPSYblogger

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  21. A POD is a POD and if you read the comment from the OIG they are speaking to all POD's. This is a landmark decision and if you had any legal knowledge whatsoever you would realize this. Stick to practicing medicine or they will be knocking on your office door soon enough.

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  22. We'll see. Get a real job.

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  23. anonymous 8:08 would love to talk with you about how you structured and how to structure this concept. I have been thinking of this for a while and feel that this will be future of this industry to help contain and control cost while maintaining excellent care!

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  24. A friend of mine who is new to Spine works for a distributor that keeps pushing PODs to the Spine Surgeons. She asked me about PODs, but I had no idea so I ended up here after searching the internet. To me this sounds like a shady deal, my question to those more experienced is: should she be concerned about working there, and is there a chance that she can get in legal trouble if she's told to push the surgeons into a POD created by the distributor and surgeon/s?

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  25. To Anonymous 8/4, 1:17PM

    This is Anonymous 8:08. I would be happy to speak with you about setting up a legal and ethical POD based on our model.

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  26. what jurisdiction of the federal government would investigate this? FBI?

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  27. Anonymous 8:08, I would like to speak with you about setting up a legal and ethical POD. Recently, I have been trying to research info on this subject. Can you help me?

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  28. Two questions for everyone:
    1) Can anyone comment as to what (if any) benefit PODs are to the implant manufacturer? Obviously, the streamlined process of PODs saves cost which is a good thing for physicians in leu of the declining reimbursement for these procedures. But is there a benefit to the manufacturer (other than selling more stuff to certain PODs)?
    2) For the physicians who are part of a POD; have you identified any gaps that exist now that you're not working through a distributor and/or manufacturer sales rep? Are you finding things like education, service, or anything else that may be lacking now?
    Thank you for your comments!

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  29. 1. The primary benefit for an implant manufacturer is the elimination of the distribution, sales and marketing costs that most manufacturers support. This can add 30-40% of the cost of an implant to a hospital.
    2. My rep is well trained, very reliable and provides excellent service at a reasonable salary.

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  30. I am a surgeon, I don't have a POD but would consider it and would like to weigh in on a few things (some philosophical, some about PODs)

    First, the idea that the ownership in a distributorship would adversely affect an ethical surgeon's judgment as to how to tackle a problem in the operating room is ridiculous. There are over a hundred companies making implants now and the differences between the implants themselves are in general completely insignificant. There are two dozen companies selling implants that are excellent and FDA approved to physician owned distributorships. Is the medtronic pedicle screw superior to alphatec or integra? No. They are all the same. If you are well trained and know what you are doing,you can select appropriate surgical candidates, and perform surgery effectively it does not matter what implants you use. Some hospitals severely restrict surgeon choice in implants just because they get a good deal from one company but nobody cries foul that the hospital is hurting the patient motivated by profit in choosing implants. Most of you don't do spine surgery. I do it three days a week. If you know what you are doing, you get good results with anything that is FDA approved. There is zero reliable data to refute this.
    I have no understanding of why some people have such animus against spine surgeons trying to make money off implants. Dentists get to charge for their implants. They charge a lot. They demand cash. Nobody cries foul when they do this. If you trust a surgeon to cut you open and manipulate the tissues of your spine, then I would trust that they aren't doing so for just money. This impulse for money would exist in the absence of implant income. In my community one neurosurgeon just lost his license basically for operating on any patient that walked in his door. The fee for service model rewards operating on more patients. Good surgeons see their patients, examine their patients, and counsel them appropriately on the risks and potential benefits of surgery before the PATIENT decides to undergo surgery. I have a PA but I see every patient before any surgery and I round on them every day they are in the hospital.

    Every american is entitled the american dream. Making money is not everything but doing so allows people to do the rest of what makes life rich and rewarding. The comments above reflect a very odd point of view to me. Just because spine surgeons make good livings, if they find another way to improve their incomes it somehow must be unethical or wrong? Stop for one moment and think about that. Surgeons are in general good people who care about their patients' outcomes. They are compensated well compared to some, not so well compared to others. Every single surgery we do represents a journey we are taking with the patient that has a lot of risk. Nobody else in that room takes the risk that the patient does, but the surgeon is definitely in second place.

    In a medicare fusion case, the rep will routinely make more than the surgeon does. All he does is show up with some screws and rods, fill out the paperwork and go home with anywhere from 8-25% of the ridiculously high implant cost. His only risk is that he won't get called for another case anytime soon. Anyone who thinks that is a better situation for the public than for the surgeon to make a little more on the case, have the choice of his rep to reliably deliver the hardware and support him/her, and significantly reduce the cost of implants to hospitals and payors is simply delusional.

    In the end, the surgeons are the sharp end of the stick in this battle. They know the pathology, they know the options for how to handle different anatomy problems (in the end all a surgeon can do is change anatomy), the patient has trusted them to try and make their life better. Who is better to decide what implants to use and to make a profit on the efficient delivery and use of those implants?

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  31. Simple math for all the misinformation out there about how loaded and how much money doctors/surgeons make. A spine surgery procedure pays a surgeon x; the hospital cost ranges from 4-20x! This is a free-market system right. Lets cut back or eliminate the middle-people (in some cases, there are even middlemen for the middlemen) and see what the cost to the patients, hospitals and insurance compannies (including Uncle Sam) would be! These big companies buy up their competition... no mention of those deals, RIGHT!

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  32. Hey Dr Burton and Dr Steinmann, we are all headed to your hospital to offer them lower pricing than you are currently charging for your off-brand implants. Since your statements and position are that you have chosen to switch to implanting these backyard implants in order to save the hospital money, you better get ready to convince your hospital to bulk-buy your garage full of implants or come up with a compelling reason why you can't switch back to using the major manufacturers now. You want to be an implant distributor? Here you go.

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  33. Our company has helped surgeons throughout the US create significant ancillary revenue streams through a very legal strategy we’ve developed. We are not a POD. We have a different structure that works. Basically, we are an implant design, manufacturing and marketing company exclusively for spine and orthopedic surgeons. We look to partner with surgeons (through an investment strategy) and become the distributor of surgical hardware systems. I would be happy to discuss our strategy with any of you further. mymedrep@ymail.com for further information.

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  34. Thanks for the FANTASTIC post! This information is really good and thanks a ton for sharing it :-)
    Orthopedic Surgeon Los Angeles

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