Over the past five years,

Zimmer

(ZMH)

has introduced dozens of new orthopedic products. But not one qualified under federal rules as a truly innovative technology.

Instead, Food and Drug Administration data show, all gained clearance through the so-called 510(k) process for being "substantially equivalent" to items already available to the public. Since 2000, in fact, the big orthopedic implant companies have combined to gain regulatory approval for just five hips and one knee that qualify as breakthrough devices.

There is one area in which the new devices clearly differ. They tend to cost far more, allowing manufacturers -- companies such as Zimmer,

Stryker

(SYK) - Get Report

and

Biomet

( BMET) -- to pocket fatter profits.

Now, though, some observers warn of tougher times for the device makers. These people say cash-strapped hospitals are demanding greater cost consciousness from surgeons. They say doctors have been floored by findings that the newer, costlier devices don't always make for healthier patients. As a result, implant makers could see their profits pinched as demand eases for the newer devices.

"Zimmer has mentioned that they are discounting more heavily," notes Bear Stearns analyst Milton Hsu, who rates Zimmer outperform and the sector market-weight. He adds that Zimmer has shown enough flexibility that it could actually benefit from hospital belt-tightening. Even so, he adds, "it appears that some hospitals are placing the burden on the industry to demonstrate the economic value of premium-priced technologies before allowing them to be sold."

On Monday, Zimmer, which emphasizes that it does have innovative products in the pipeline, rose 71 cents to $78.45. Stryker, which is responsible for one of the five breakthrough hips, gained $1 to $48.89. Biomet, maker of the only recent innovative knee, added 53 cents to $35.06.

Drip, Drip

To be fair, the lion's share of medical devices earn their regulatory blessings as equivalent rather than breakthrough products. Moreover, newer gear often boasts features that can set it apart from its predecessors. Indeed, Zimmer CEO Raymond Elliott points to such changes, including the use of stronger highly cross-linked polyethylene, as "real improvements" in the joint replacement field.

"Fixation materials and biomechanics have been significantly enhanced," Elliott says. "Today's implants work better -- because they last a long time."

Industry consultant Timothy McTighe emphasizes that gains can be made even when newer devices don't constitute a breakthrough.

"The thing about orthopedics, which everybody needs to emphasize, is that it doesn't leap forward," insists McTighe, who doubles as executive director of the Joint Implant Surgery and Research Foundation. "The best science is incremental. That's where orthopedics is going."

That said, orthopedic companies sink very little of their cash into actually making new devices. On average, they spend just 5% of sales -- compared with an estimated 18% in the drug industry -- on research and development. Moreover, they often enjoy gross margins of more than 70%.

"These companies can come up with new product lines very, very easily and at very little cost," says Jeff Villwock, a healthcare analyst for Caymus Partners in Atlanta. "Knees and hips aren't rocket science. ... There's not a whole lot of R&D going on."

What's more, the newer, costlier devices don't necessarily make for happier, healthier patients. Jan Fitzgerald, who serves as the quality manager at Baystate Medical Center in Massachusetts, says a bigger factor in patient wellness is the skill of the doctor who handles the procedure.

"High-end devices don't necessarily have better outcomes than low-end devices," Fitzgerald recently told

TheStreet.com

. "How well a device works is not so much in its price but in the operator's skill."

Fitzgerald goes on to say that such findings have, in fact, been "well-documented" far outside her own facility.

Registering Success

Unlike the U.S., Sweden operates a national joint registry that tracks the success rates of individual devices.

Thus, many -- including Bernstein analyst Bruce Nudell -- have found themselves looking overseas for information. Nudell learned that only 7% of Swedish patients who undergo hip replacement surgery require revision surgery 10 years down the road. Moreover, only 5% suffer from the "asceptic loosening" that has driven U.S. surgeons to use premium products -- featuring highly cross-linked polyethylene and cementless fixation -- instead of old standbys.

"Interestingly, Swedish physicians have generally achieved these excellent results with low-tech cemented implants which frequently employ all-poly cups," Nudell notes. "In fact, the best results seen to date in the Swedish Register were seen with the Spectron EF, which uses an all-poly cup design." That product is made by Britain's

Smith & Nephew

(SNN) - Get Report

.

Swedish success rates compare quite favorably with numbers regularly touted by U.S. device makers that tend to promote higher-end products instead. And Europeans, in general, have enjoyed great outcomes while paying far less for artificial joints than their American counterparts.

Specifically, Nudell points out, Europeans spend an average of just $1,270 -- or about one-fourth of what Americans spend -- for artificial hips. Thus, some have started to question whether U.S. patients are really getting their money's worth.

Nudell suggests device makers could face new limitations when attempting to shift patients to higher-end devices in the future. And while Hsu writes that many doctors are initially "shocked" to learn that paying more doesn't necessarily mean better outcomes, he says they quickly come to embrace the use of lower-cost older devices. His firm seeks to do business with the companies it covers.

"Although more work is necessary on this issue," Hsu concedes, "the reality is that only one of the 433 surgeons in our January survey refused to comply with the hospital's request to standardize" devices in order to cut costs.

Reversing a Trend

Through its Marketrack division, Millennium Research Group constantly tracks the types -- and prices -- of implants used by hospitals all across the country.

Because the average price of orthopedic implants has risen again this year, the firm stops short of joining those who see a trend reversal that will finally drag overall prices down. Still, the firm sees the potential for such change.

"The hip and knee business is the most lucrative segment of the market for most orthopedic manufacturers," says Melicent Lavers, senior analyst for MRG's orthopedics group. "But the hospitals are losing money on the surgeries right now. So it logically makes sense that they should do something about it."

Indeed, she says, some hospitals already have. For example, she says, one hospital managed to cap its implant prices and slash $1.5 million in costs as a result. Going forward, she believes, more and more hospitals could try to follow suit.

Moreover, Lavers suggests, the manufacturers themselves may already see the changes coming. Her colleague, Sarit Daniel, agrees.

"I think the vendors expect this is the wave of the future," Daniel says.

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