The Spine as Profit Center

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Side Effects - The Spine as Profit Center

By REED ABELSON

http://www.nytimes.com/2006/12/30/business/30spine.html?

_r=1 & oref=slogin

Spinal-fusion surgery is one of the most lucrative areas of

medicine. An estimated half-million Americans had the operation this

year, generating billions of dollars for hospitals and doctors.

But there have been serious questions about how much the surgery

actually helps patients with back pain and whether surgeons'

generous fees might motivate them to overuse the procedure. Those

concerns are now heightened by a growing trend among some surgeons

to profit in yet another way — by investing in companies that make

screws and other hardware they install.

The parts can be highly profitable. A single screw that goes into

the spine, for example, sells for about $1,000 — at least 10 times

the cost of making it.

Within the medical device industry, it has been well chronicled how

companies use consulting ties and other financial relationships to

try to gain favor with the surgeons using their devices. But critics

are especially troubled by the emerging trend in spinal devices,

which so far has occurred largely under the radar.

Doctors' taking significant ownership stakes in spinal parts makers,

critics say, provides an extra financial incentive for a doctor to

recommend a surgery. It may be one of the most distinct examples yet

of the way monetary considerations can play a role in the way

doctors practice medicine.

Such doctors face " an awfully pernicious conflict of interest, " said

Dr. A. Deyo, a physician and health services professor at

the University of Washington in Seattle.

About 30 start-up companies have begun selling spinal devices,

including screws, in the last couple of years. And industry experts

say about a dozen companies have doctors among their investors.

Because most of the companies are private and the relationships are

not publicly disclosed, there is no way to know how many spine

surgeons around the country are partial owners of device makers.

Typically, patients are not aware of the doctor's financial

interests. One patient who is suing her surgeon for malpractice

learned only during the legal discovery process that her surgeon had

a financial interest in the maker of the artificial disk he

installed in her spine.

Federal regulators have voiced concerns about the growing popularity

of the investment arrangements, which would potentially violate

antikickback laws if doctors receive stock or are otherwise

compensated to use or recommend certain devices.

" This is an area that is new and growing, " Vicki L. , a

senior attorney in the Office of Inspector General at the Department

of Health and Human Services, said in an interview. In a recent

letter to a device industry trade group, Ms. wrote that

the " ventures should be closely scrutinized under the fraud and

abuse laws. "

Some spine surgeons are also concerned about whether they and their

colleagues should enter into such arrangements. " These are, I

believe, unethical and bias the doctors' choice for what is best for

the patient, " said Dr. D. Rosen, a spine surgeon at the

University of California at Irvine, who is the president of the

newly formed Association of Ethical Spine Surgeons. The group has

about 75 members so far, who have agreed not to invest in companies

whose devices they use.

But doctors who do sometimes use the products of companies in which

they invest say they do not let financial interests influence their

medical judgment. Some surgeons and companies say that patients can

even benefit because the collaboration means the devices have been

better designed to meet their needs.

But industry experts say that that doctors' financial needs may be

also be a big motive.

As surgeon fees have fallen over the years, doctors have been

increasingly attracted to other sources of revenue, said Dr.

Cherf, an orthopedic surgeon in Chicago who also advises hospitals

about health care trends. That is why many surgeons have invested in

specialty hospitals, he said.

And now, devices " are the low-hanging fruit, " he said. " There's a

lot of money in devices. "

One of the fastest growing companies is Allez Spine, of Irvine,

Calif. It was founded on a business model that called for the 120

doctors who invested in Allez to serve as " its customer base, "

according to a lawsuit filed by a former chief executive last April.

Those doctors, who pay $50,000 or more to become investors, own two-

thirds of the company, according to legal filings.

Selling the company's screws to its " investor-doctors " was a way

to " generate more profits for the company " according to a related

lawsuit involving the former executive.

At one midsize Nevada hospital, a surgeon who performs many spinal

fusions is an Allez investor who uses the company's screws, said an

administrator. He spoke on condition of anonymity because the

hospital fears alienating its surgeons. While some doctors at the

hospital who invested in Allez choose not to use its screws, others

seem " financially driven " to select them, he said.

The identities of most of the surgeons who invest in Allez are not

publicly disclosed. And the doctors who could be identified and were

called for comment did not return repeated telephone calls.

Dr. Geehr, president of Allez Spine, said that many of his

surgeon-investors did not use the company's products, although he

declined to say how much of the company's sales came from surgeons

who were not also investors.

The company offers hospitals products at lower prices than the

competition, Dr. Geehr said, although he declined to discuss

specific pricing.

The spinal device market, which has doubled in the last three years,

is particularly attractive to newcomers, said Stan Mendenhall, the

editor of Orthopedic Network News, an industry newsletter. Spinal

screws are relatively simple to develop and cost only $65 to $100 to

make, he said, often by a supplier that handles the production of

screws for a variety of companies.

There are about 100 companies in the spinal devices field, and some

of the newest and fastest growing have some level of doctor

ownership, Mr. Mendenhall said.

Patients who find out about these ties can be upset, as was

Kennedy, whose disk-replacement operation in September 2002 was

performed by Dr. A. Balderston, a spine surgeon in

Philadelphia.

Ms. Kennedy says the surgery was unsuccessful and made her condition

even worse. She is now suing Dr. Balderston for malpractice, and the

maker of the artificial disk, Spine Solutions, for product

liability.

Ms. Kennedy says she did not fully understand that the disk was

experimental. She discovered only later that Dr. Balderston was an

investor in a venture capital fund that owned Spine Solutions at the

time of the surgery. A lawyer for the company declined to comment.

The company and the doctor " failed to disclose that Dr. Balderston

had a significant financial interest in the outcome of the

experiment, " according to the lawsuit.

" I've really been guinea pigged and betrayed, " Ms. Kennedy said in

an interview.

A lawyer from the firm representing Dr. Balderston said the firm had

a policy of not commenting on pending litigation. The case is

expected to go to trial in March, according to Ms. Kennedy.

Even hospitals where spinal-fusion surgeries are performed may not

know when doctors own a piece of a device maker. A few hospitals,

though, require the device makers and doctors to tell them about the

arrangements.

At Hoag Memorial Hospital Presbyterian in Newport Beach, Calif.,

several doctors are investors in Allez, including Dr.

Dobkin, a surgeon at the hospital. He did not return repeated calls

for comment.

" We use heavy disclosure practices with our vendors and our

physicians to understand these relationships, " said

Mitzner, the chief financial officer for Hoag.

At the Tenet Healthcare hospital chain, the California hospitals it

owns have signed a contract with Allez that calls, among other

things, for the doctors to agree to disclose any ownership interests

to their patients.

Allez says physicians who invest in the company and use its products

in California disclose those ties to patients. " All our

relationships are disclosed, " Dr. Geehr said.

Some of the new companies aim to recruit surgeons who perform a high

volume of back operations, according to doctors who have been

approached. The exact nature of the investment opportunity is left

vague in the discussions, the doctors say, with details made

available only to those who agree to become investors.

One surgeon described being contacted by Globus Medical, a start-up

company in Audubon, Pa. The surgeon said he was not persuaded to use

Globus screws and other hardware, despite the sales representative's

mention of the " good opportunities " available if he were to become a

large user.

The policies of Globus forbid its representatives from offering

stock to reward surgeons who use their products, said Dave Demski,

chief financial officer of Globus.

The doctors who do invest, Mr. Demski said, are doing so because

they are interested in owning stock in businesses they understand,

like Globus. " It's really based on their enthusiasm for what we're

doing, " he said.

At Alphatec Holdings, a company in Carlsbad, Calif., doctors are

shareholders because they have either invested directly or are paid

in stock for consulting, according to filings by Alphatec, which is

one of the few publicly held companies among the small start-ups.

The chairman of Alphatec's scientific advisory board is Dr.

J. Hochschuler, a prominent surgeon who helped start the Texas Back

Institute, one of the largest spine clinics in the country.

For his work as an adviser, Dr. Hochschuler received a restricted

stock grant that was worth about $640,000 when Alphatec went public

in June, according to the company's public filings. Because the

share price has fallen, the grant — which vests over five years — is

currently now worth only about $270,000.

Dr. Hochschuler, in a written response to an interview request, said

doctors should work closely with device companies like

Alphatec. " Surgeon involvement in the development of surgical

devices is paramount in the creation of these devices and techniques

that allow our patients to return to their lives in a more timely

fashion, with less pain, " he wrote.

Dr. Hochschuler's ties to the company do not influence his choice of

devices, he said in a follow-up e-mail message. He said he had used

the Alphatec implants " probably less than 5 times so that I

thoroughly know and understand the pros and cons. "

An Alphatec spokesman also said physicians played an important role

in developing new products. " There is a critical relationship

between physicians and engineers at Alphatec, " said the spokesman,

Schull.

Some surgeons who have bought Alphatec stock argue that their

holdings are no different than their investments in any other

company.

Dr. E. Claiborne Irby Jr., a surgeon in Richmond, Va., who invested

in Alphatec before it went public, says he uses its devices, but not

exclusively. " I don't change anything I do because of any kind of

investment, " he said.

But federal regulators and law-enforcement officials are on the

lookout for surgeons who step over the line.

Doctors " are supposed to make the decision based on the best

interest of the patient, " said Winn, a lawyer in the United

States attorney's office in Seattle, who has aired his concerns in a

speech to spine surgeons.

To do otherwise, he said in an interview, " is a violation of the

ethical rules, and it has been since the time of Hippocrates. "