Summary
Most patients receiving high tech implantables (cardiac and orthopedic) are Medicare. Facilities providing these services have fixed payments which will remain flat or decrease in the constrained economic environment. Facilities will be under increased pressure to manage their costs, and implantables are the primary cost, and the one least managed in many facilites. Rationalizing which patient gets which implant, and which accessory and collatoral product, can drastically reduce overall implant cost. High-tech implant makers will feel the pressure on facilites to reduce implant costs. For non-medicare patients whose procedures are schedulable, foriegn travel also poses an earnings threat to US implant companies.
Analysis
The Boston Globe article of Dec 31, 2008 (Medical devices not immune to recession worries By Matthew Perrone) touches on several aspects of the device and medical product industries that are not easily lumped into one group. Segregating these classes allows greater reliability of company performance forecasting.
Many elective procedures have been delayed or canceled over the last two quarters. Anesthesiologists, plastic surgeons, and dermatologists have reported dramatic downturns in elective procedures, and outpatient surgery centers have been effected. Many of these procedures are "out-of-pocket" expenses, and patients have less discretionary funds in an economic downturn.
Orthopedic implants are a slightly different story. Some types of procedures are elective (knee replacement), but more importantly the selection of which implant to use is many times discretionary. The price of these implants varies widely, and facilities of all sizes will be pressed to use the lesser expensive options as payments for the service will remain flat or decrease in the general economic environment of the U.S. The most easily observed payment stagnation is Medicare's payments, the largest payer for joint replacement.
The other discretionary cost in orthopedic implants is the use of "accessories," and the choice of which one is used. These are glues, bonding agents, screws, plates, bone filler, bone transplants, and other materials that add cost. Benefits to the specific patient are often arguable, and the price variation between products will stimulate discussions of opportunity for the facility's costs to be reduced. Specialty producers of discretionary adjunctive products will feel pricing pressures.
High end / high costs implants (e.g. titanium knees implants, artificial spine disks) will be hard pressed to maintain sales volume and margins. Even makers of products with a wide range of costs will predictably see deterioration in sales of their higher end products. Implant makers that lead the market in injury repair may be more insulated from these pressures, as a higher percentage of their products have less competition, the traumatic injuries their products address are more likely to occur in a younger (non-Medicare) population, and the injury often requires rapid care which negates much second-guessing, scheduling, and standardization-based savings.
Companies that participate in this market include, but are not limited to,
Stryker (SYK)
Zimmer Holdings, Inc. (ZMH)
Synthes (CHF)
Johnson & Johnson (JNJ) division DuPuy
Smith & Nephew (SNN)
Wright Medical Group, Inc (WMGI)
Medtronic (MDT)
Cardiac implants are often life saving procedures and are less likely to be elective or lend themselves to patient or payer shopping. Nonetheless, there are options for selection of these devices also, and a one-size-fits-all nearly universal use of top of the line pacemakers or stents is a strategy that leads to higher than neccasary costs for the facility, with marginal if any benefit to the patient. Recessionary pressures will again force reconsideration of this strategy in institutions that have not already done so.
Companies that participate in this market include, but are not limited to,
Boston Scientific (BSX) division Cadent
St. Jude Medical (STJ)
Matrons (MDT)
For all but the injury repair done at the time of injury (or soon thereafter), and cardiac implants performed as lifesaving interventions, U.S. orthopedic and cardiac implants will also bear the pressure of international markets for these procedures. Allmedicaltourism.com is but one site that allows patients to easily search for discounts of 50-75% off U.S. prices for their procedures. Patients paying for their own care, and many employers, are now considering travel as an option. Again, the threat is not to dramatic losses of volume in the near term, it is the loss of high-end high-margin "sales" to foreign competitors that will pressure implant manufacturers.
The path to reduced costs for facilities, with corresponding lower earnings for manufacturers, is currently difficult and encumbered by legal complications. Either physician employment by facilities (i.e. provider integration), or federal change in prohibitions on sharing cost savings with independent physicians, would facilitate cost savings. Malpractice fears when the "best" product is not used will also have to be addressed for the forces discussed here to have full effect on product selection.
Hospitals have already felt the recession's effects. They are running out of options to reduce costs, and supplies of all types are opportunities for cost reduction through standardization, and rationalization of use. Implant manufacturers are sure to experience reduced volumes of high-end products.
