Medical device makers go through a murky phase

Medical device manufacturers such as Bloomington-based Cook Medical Inc., and the Warsaw-based makers of orthopedic implants Zimmer Holding Inc. and Biomet Inc. might go through turbulent times over the next four years.
The credit, unfortunately, does not go to the 2010 health reform law, but can be attributed to new taxes imposed by health reforms on medical device makers will be almost counterbalanced by new business from the law’s expansion of consumers with health insurance, according to Deloitte Consulting LLP.

However, Deloitte analysts Sanjay Behl, Terry Hisey and Ralph Marcello predict that by 2015 medical device makers are expected to undergo 10% losses in their current earnings. This is due to indirect changes in the health care sector that will transfer market power from medical product manufacturers to hospitals and large physician groups, who will be burdened by immense financial pressure from health plans and consumers to save costs.
Health care providers have large amounts of data in their electronic medical record systems in order to determine which products are helping them and which are not.

Apart from this, an orthopedic surgeon, for instance, is no longer allowed to pick his/her favorite implants now that hospitals are employing more and more physicians. On the contrary, the purchasing authority will be invested with the group thereby allowing the hospital to demand lower prices and eliminate certain brands of implants. The same is applicable for stents, pacemakers, and other kinds of devices.
In an article in Deloitte Review research journal, Behl, Hisey and Marcello state, “The impact of health reform on medical devices comes primarily from pricing pressure as physicians lose purchase decision-making power especially over devices that are more readily substituted. Hospitals and patients will increasingly make decisions about these products.”

This implies that rather than sending medical representatives to the office of a surgeon, medical device companies will have to bid to centralized purchasing officials of hospitals and large physician groups.
Deloitte analysts wrote, “As their products get more commoditized, life sciences companies can soon be dealing with the procurement department or medical administrator. However, most manufacturers may not be structured to compete on price.”

The strategy suggested by Deloitte analysts is that medical device makers must bundle an entire contract of support services and solutions in addition to products, and offer devices to a hospital. Compared to a 90-percent margin for most medical devices, the services profit margins runs about 40 percent, which is the only problem associated with this strategy.

To conclude, Deloitte says that this is one of the main reasons why medical device makers cannot evade a huge revenue impact.