The 10 Dumbest Things in Health Care This Year

2. Zimmer's Changing Ways

Zimmer (ZMH Quote) better have a Plan Z.

The Indiana-based device maker flourished when it could make big payments to orthopedic surgeons, who helped drive the company's prices and market share ever higher. But Zimmer caught the government's attention in the process.

To be fair, in recent years, the government has investigated five major orthopedic companies suspected of rewarding physicians with illegal kickbacks. But when it came time to settle this fall, it slapped Zimmer with the biggest fine by far. Zimmer will pay more by itself than will the other four companies combined.

JPMorgan analyst Michael Weinstein suspects he might know why. During the first 10 months of this year, he notes, Zimmer spent $85 million -- or 6.2% of its sales -- on royalties and consulting fees. The company doesn't even invest that much in research and development.

"At Zimmer, more than 100 institutions or surgeons were paid in excess of $100,000 over the last 10 months," Weinstein marveled. "Moreover, 21 received in excess of $1 million. ... These figures are fairly remarkable and, in the coming year with the new level of disclosure and oversight, it will be interesting to see the degree to which these payments change and what impact it has" on physician relationships and the company's market share.

Credit Suisse analyst Kristen Stewart suspects she already knows.

"With an even playing field, we believe it is possible that those that gained market share as a result of physician contracts may now be at risk," Stewart warned when initiating coverage of Zimmer with an underperform rating last month. And "over the past five years, Zimmer has had the greatest market share gains.

"We believe new product introduction and greater scale were principle drivers, but there is the possibility that some consulting agreements may have shifted some incremental market share."

Funny how that works, eh?

Dumb-O-Meter Score: 92. "We believe that Zimmer is well positioned to abide by the requirements of the settlement," the company said, "due to our current corporate compliance program, which we began developing in 2004 and implemented in 2005." It's nice how that program has allowed generous physician payments to this day.