Editor's Letter

Pricing Pressures

Christopher Delporte

The orthopedic industry historically has been a safe business during economic downturns. It seems, however, that even some of the large publicly traded OEMs are slogging through the market’s murky conditions given current stock price lags and, in some cases, slumps in revenue.

Industry executives and analysts have concerns about price pressure resulting from a weak hospital sector and probable healthcare reform currently being debated in Washington, D.C. The recession has already had some impact as people lose employer-provided insurance and decide to put off or delay medical procedures.

A recent survey by the American Hospital Association reported that nearly all of the 1,078 hospitals taking part in the study said their capital situation had not improved since December or was still getting worse.

At the risk of being the voice of doom (don’t shoot the messenger), medical device industry analysts indicate that things may get a little worse before they get better. Hospital administrators are looking for cost savings under every rock. This could—and often does—include insisting that surgeons use lower-cost implants.

Results of a survey of hospital purchasing managers conducted by Wachovia at the end of the first quarter suggested that price pressure on orthopedics was likely to increase. Those surveyed expected the average joint implant cost to decline by 4.5 percent within the next 12 months, with spine implant costs down 4.7 percent, according to the survey.

Michael Matson, a medical device industry analyst with Wachovia Capital Markets, told Reuters news service that he did not expect prices to match the forecasts of the hospital purchasing managers, but said their responses were a sign of “intensified pressure” on orthopedic firms.

To add to the uncertainty, Medicare, which provides insurance for about 45 million Americans, will run out of money in eight years, trustees of the program reported in early May. By 2016, the program will be paying out more in benefits than it collects in taxes. It’s anyone’s guess how this will play out in the long term. However, a recent decision by Medicare on the Inpatient Prospective Payment System rule will have a more immediate impact on orthopedic firms and payments from hospitals (see Reimbursement Roadmap).

Despite the pressure, orthopedic executives remain optimistic.

“There are opportunities that perhaps at first may be slightly more expensive, but if they can reduce the burden of revision surgery, for example, then it’s worth it—and less expensive—in the long term,” Patrick Treacy, vice president and general manager, Knee Reconstruction, for Stryker Orthopaedics, a division of Kalamazoo, Mich.-based Stryker Corp., told me recently. “Cost reduction doesn’t mean there’s no room for innovation. That’s our plan for the future—cost-effective solutions driven by technology improvements … high-tech doesn’t necessarily mean high cost.” (For more from Treacy, see this month’s feature on joint reconstruction market trends).

The good news is that most industry watchers still predict overall market growth for orthopedic manufacturers. Solid demographics—and a host of other positive factors—are still on the industry’s side (see this month’s implant manufacturing feature and the trauma trends story).

See? There’s always a silver lining. Even if the price of silver isn’t what is used to be.

Christopher Delporte
Group Editor