Investors in major orthopedics makers got another round of unwelcome news earlier this week. The U.S. government has apparently ratcheted up its investigation of the industry and has issued a new round of subpoenas, this time referring to possible criminal violations (something that wasn't mentioned in the first go-around).
Thus far, Stryker
What the government is in a twist about is open for debate and speculation, as it has said little more other than that it's investigating possible "anti-competitive practices." As you may imagine, that's a pretty broad net.
The initial government investigation explored the links between the orthopedic industry and certain physicians -- specifically, whether the numerous consulting arrangements that many manufacturers had with physicians constituted a kickback scheme or some other unfair incentive structure. In many cases, doctors are free to select whatever implant or device they deem best and the hospital then pays for it. You can see, then, how a doctor might be tempted to steer business in one direction or another based on a "consulting payment" on the side.
Perhaps the government has found enough dirt there to push a second round of investigations and claim that this really is a kickback scheme. Or perhaps it believes it's found hints of other types of collusion in the industry -- after all, hospitals' attempts to fight back and hold the line on orthopedic implant pricing haven't necessarily lived up to its original billing.
Even if the government does uncover criminal practices, I don't see it dealing a fatal (or even particularly serious) blow to the industry. Baby boomers are still getting older, and they still need artificial hips and knees. What's more, the government can't overturn patents and won't impose price controls or ban them from selling the devices. So, perhaps a few sacrificial lambs will be led to jail, and some large (perhaps in the hundreds of millions of dollars) checks will be written to pay fines, but this is still a powerful industry with very strong underlying fundamental trends.
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Fool contributor Stephen Simpson owns share of Johnson & Johnson, but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).
