The tension between medical innovation and institutional cost stewardship is one of healthcare’s most consequential—and least openly discussed dynamics. Health system leaders navigate it daily, often without a clear framework. The result is inconsistent governance, patchwork conflict-of-interest policies, and financial arrangements between physicians and medical device companies that can create friction with value-based care goals.
Addressing this gap directly advances both financial integrity and care quality—two priorities no health system leader can afford to separate.
Where the model works—and where it breaks down
Financial relationships between physicians and industry are not inherently problematic. In many cases, they often are essential to advancing medicine. A surgeon who has performed thousands of joint replacements brings valuable expertise to product development. When that surgeon identifies a design limitation, that insight should shape the next generation of devices. Royalties and consulting arrangements can and should appropriately compensate physicians for those contributions. The challenge lies in how those agreements are structured.
Many royalty agreements are based on physician use of the implant to receive royalty payments. When a surgeon's income is tied to each unit implanted, physician preference extends beyond purely clinical considerations. That financial incentive, reinforced with a personal investment in the product, can work against a health system's ability to standardize purchasing, negotiate pricing, and improve systemwide affordability. When a health system selects a vendor outside a surgeon's royalty arrangement, the physician may face a direct financial loss. Some respond by shifting cases to competing facilities, fragmenting surgical volume, and disrupting patient access.
PODs: A structure that requires governance
Physician-owned distributorships (PODs) represent one of the clearest conflicts between physician financial interests and institutional integrity. In this arrangement, a physician creates a distribution company between a device manufacturer hospitals, earning a transaction fee for channel access rather than product innovation or clinical outcomes.
When a physician earns fees every time a hospital purchases through their distributorship, the incentive to require a hospital to carry those products is not incidental. Health systems committed to evidence-based purchasing should treat PODs as a category requiring clear policy guidance, not case-by-case review. That means prohibiting purchases through physician-owned distribution channels and establishing disclosure requirements that identify these arrangements before they reach the value analysis process.
Actions that accelerate progress
Establish a personal conflict-of-interest disclosure policy.
The case for action is well-documented: A systematic review of 22 studies found that the prevalence of conflict-of-interest policies among medical schools and teaching hospitals ranged from 5% to 100%, with a median of 85%—and North American institutions were among the most likely to have formal policies in place. That figure is encouraging, but a median of 85% also indicates that a meaningful portion of institutions are operating without one. And having a policy on paper is not the same as having a policy that works. (Fabbri A, Hone KR, Hróbjartsson A, Lundh A. Conflict of Interest Policies at Medical Schools and Teaching Hospitals: A Systematic Review of Cross-sectional Studies. Int J Health Policy Manag. 2022;11(8):1274-1285.)
Annual disclosure requirements for physicians and supply chain leaders involved in purchasing decisions create the foundation for effective governance. These policies should address direct financial relationships—including royalties, consulting fees, speaker honoraria, and equity stakes that connect individuals to vendors or products. The policy only works when applied consistently.
- Build a separate research conflict-of-interest policy. Sponsored research introduces a distinct and often overlooked category of influence that operates independently of purchasing authority. A physician receiving industry funding for a clinical study has a conflict regardless of whether they serve on a value analysis committee. Health systems that treat research and personal financial interests as a single category may underestimate the scope of the issue. A dedicated research conflict-of-interest policy should establish separate disclosure requirements, review processes, and participation boundaries that protect both the institution and the physician, regardless of where purchasing decisions are made.
- Create structured processes for conflicted individuals. Exclusion isn't always the right answer. Health systems can lose critical clinical expertise by removing every conflicted physician from every value analysis decision. Structured anonymization—such as blinding supplier names and presenting objective criteria—allows conflicted physicians to contribute clinical judgment without influencing contracting outcomes.
- Decouple physician financial incentives from facility-specific utilization. Physicians who contribute to device design should receive royalties wherever that product is used—not only when their employer purchases it. When utilization requirements are embedded in royalty agreements, purchasing decisions can shift from clinical outcomes toward revenue protection. Health systems are positioned to negotiate these terms, and the value-based care environment makes those conversations increasingly necessary.
Structure is strategy
The financial structures governing physician-industry relationships were built for a fee-for-service environment. As health systems assume greater financial risk and supply chain performance becomes a strategic differentiator, unmanaged financial conflicts in purchasing decisions carry greater consequence.
This is not about questioning physician integrity—it’s about building the right governance structure. Strong disclosure requirements, transparent processes, and incentive models that reward innovation without mandating utilization are not simply compliance best practices. They form the foundation of a supply chain aligned with value.
