Twin Cities med-tech start-up looks to shake up orthopedics market

Minnesota is home to more than 600 medical technology companies, and virtually all of them began when someone decided to build a business around a new medical device.

Responsive Orthopedics is different. Started by veteran Twin Cities med-tech executive Doug Kohrs and two partners, Responsive Orthopedics began with the realization of a once-in-a-lifetime sales opportunity for reasonably priced medical devices, spurred by macroeconomic changes underway in the U.S. health care system.

Kohrs and his partners realized that the ongoing transition to a financial model known as "bundled payments" is rapidly creating a new market for low-cost, standardized medical devices. But the major device makers are unwilling to sell such models because the prices are too low, and venture capital firms are reluctant to fund start-ups without the promise of premium pricing someday.

So Kohrs and his partners funded Responsive Orthopedics on their own, with backing from an as-yet unnamed large health care provider in Minnesota.

The principals quickly decided that selling low-cost systems for hip and knee replacements would be the most obvious types of devices to concentrate on first, given the early focus on bundled payments in orthopedic devices.

"As of now, the incumbent orthopedic players have yet to evolve in the right direction, in our view, creating an opening for others who are more prepared to potentially seize the opportunity," analysts with Citigroup Global Markets wrote last month in a 72-page analysis looking at how the bundled payment model is going to upset the status quo on price models among hospitals and device makers.

Hip and knee replacements are the most commonly performed inpatient procedures in Medicare; in 2014, Medicare paid about $7 billion to cover more than 400,000 such procedures. Yet the costs and the outcomes of the surgery are widely uneven, putting a strong focus on whether higher-priced devices work better.

Starting April 1, Medicare put the Twin Cities and 66 other metro regions into a program called CJR, for Comprehensive Care for Joint Replacement. For hip and knee replacement surgeries, hospitals in the program receive higher payments for "strong performance" in quality of care and spending, and penalties for poor performance.

Medicare, the taxpayer-funded insurer for those 65 and older, typically pays about $13,000 for a typical hip or knee replacement procedure, and as much as 40 percent of that pays for the medical device implant itself. Bundled payments penalize hospitals if follow-up care is overly expensive, giving hospitals more incentive to drive down costs for the initial implant.

Kohrs, 58, has been watching the Medicare payment model unfold since 2013, when a more limited, voluntary version called Bundled Payments for Care Improvement Initiative was rolled out at certain hospitals.

He also has a long-running insider's view of the industry, having started his career as a biomedical engineer and working as an executive at Johnson & Johnson Orthopedics and Zimmer, two of the four major U.S. othropedic-device manufacturers. He moved to the Twin Cities 30 years ago for a job that led to a successful career as an executive or CEO of three publicly traded medical-device companies.

Last week, Kohrs disclosed that he and two surgeon partners, from Harvard University and the University of Arkansas, have invested up to $10 million in Responsive Orthopedics — so named, because the company is responding to market demands. The company will sell devices cleared by the U.S. Food and Drug Administration and made under contract by American third-party manufacturers that make products for the major device makers.

Responsive Orthopedics is only targeting hospitals getting bundled payments for hips and knees, and it will not sell physician-owned distributorships. Early customers include Mayo Clinic and Twin Cities Orthopedics, one of the largest orthopedics practices in the country with three dozen locations.

"We want to disrupt the industry in a way that benefits the industry," Kohrs said. "This should allow Mayo and the others to get [better] pricing from the other manufacturers."

Kohrs and his two partners hope to drive down the cost of devices by up to 40 percent of the typical $4,300 sticker price for hip-and-knee replacement systems by attacking the distribution model. The self-financed company plans to announce soon that a major Minnesota health care provider with deep pockets will become a minority shareholder.

They plan to avoid the traditional venture capital and private equity investors who demand 20 percent or more annual returns on their money, which necessitates big markups on medical devices. And they will sell directly to surgical centers and hospitals, not through doctor-owned or other distributors who take a markup before selling to the end user who does the surgery.

"The Big Four do not want to deal on price," Kohrs said, referring to the biggest orthopedics companies. "Four players control a multibillion-dollar [annual] market. And their prices are too high for the emerging bundled-source market."

Kohrs said the Responsive hips and knees cost less than those made by the Big Four, because they are standardized to fit about 90 percent of patients, and don't require everything needed by a small minority of patients.

"Under bundled payment, if you spend too much, you pay, and if you save money, you benefit," said Dr. Lowry Barnes, 56, a veteran orthopedic surgeon who is one of Kohrs' partners and chairman of the orthopedic surgery department at the University of Arkansas for Medical Sciences. "Our state was the first in the country to have a state-based program for bundled care through Blue Cross Blue Shield, which has more than 65 percent of the commercial market. It's been good."

Private insurers, who typically pay more than Medicare, are imposing their own version of bundled payments.

Dr. Owen O'Neill, a surgeon with Twin Cities Orthopedics, several years ago established one-price hip-and-knee surgeries at what are now five clinics in the Twin Cities, several of which are partly owned by Twin Cities hospitals. He helped Kohrs with the design of the new products.

"We said we need to deliver better care for less money with commercial insurers," O'Neill said Friday. "One price. Our hips are $24,000 [under private insurance]. Knees are $21,000.

"Minnesota is a high-cost medical market. The physician practices have all been bought by hospitals and the hospitals 'charge up.' Facility 'fees.' It increases the costs of the care," O'Neill added.

"We deliver the entire 90-day episode care with one bill, instead of anesthesia bill, a physical therapy bill … and all the other bills and we are 30 percent less expensive [than hospitals] and patients have a better experience."

Neal St. Anthony • 612-673-7144

Joe Carlson • 612-673-4779