Gloomy outlook for medical device makers

The next four years could be rough for makers of medical devices, such as Bloomington-based Cook Medical Inc., and the Warsaw-based makers of orthopedic implants Zimmer Holding Inc. and Biomet Inc.

And it’s not because of the 2010 health reform law.

According to projections by Deloitte Consulting LLP, health reform’s new taxes on medical device makers will be roughly offset by new business from the law’s expansion of consumers with health insurance.

But medical device makers as a whole will lose 10 percent of their current revenue by 2015, according to Deloitte analysts Sanjay Behl, Terry Hisey and Ralph Marcello. That’s because indirect changes in the health care marketplace are going to shift market power from producers of medical products to hospitals and large physician groups, which will be under tremendous financial pressure from health plans and consumers to save costs.

And the health care providers will be armed with enormous amounts of data—from their electronic medical record systems—to show which products are helping them do so and which are not.

Not only that, but now that hospitals are employing more and more physicians, they are no longer allowing, say, each orthopedic surgeon to chose his or her favorite implants. Instead, those purchasing decisions are made as a group, allowing hospitals to command lower prices and often shutting out some brands of implants entirely. The same goes for stents, pacemakers and other kinds of devices.

“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,” wrote Behl, Hisey and Marcello in an article in Deloitte Review research journal. “Hospitals and patients will increasingly make decisions about these products.”

That means medical device companies, instead of sending sales people around the surgeons' offices, will increasingly have to make bids to the centralized purchasing officials of hospitals and large physician groups.

“As their products get more commoditized, life sciences companies can soon be dealing with the procurement department or medical administrator,” the Deloitte analysts wrote. “However, most manufacturers may not be structured to compete on price.”

The Deloitte analysts suggest one strategy for medical device makers: pitch not merely products, but solutions, by bundling all manner of support services into a contract to supply devices to a hospital. The only problem with that, however, is that services profit margins run about 40 percent, compared with the 90-percent margins of most medical devices themselves.

And that’s why Deloitte concludes the medical device makers cannot avoid a big hit to their revenue.