Med-Tech Companies: Avoid the Squeeze of Healthcare Reform

September 18, 2012 — Leave a comment

Healthcare reform in the U.S. has been a controversial topic. Depending on your perspective, the law can be viewed as highly positive or highly negative. For medical technology companies, there was supposed to be puts and takes in the law. Med tech companies were hit with a new tax of 2.3% of sales, which was to be offset by increases in volume as more patients gain access to insurance and the healthcare system.

However, a recent analysis by investment bank Roth Capital Partners refutes this claim of a volume windfall. The report looked at the performance of med-tech companies in the state of Massachusetts where healthcare reform was passed in 2006. Based on the analysis, 8 of 9 companies reviewed saw no sign of a windfall with the passage of healthcare reform.

Even if healthcare reform did bring with it an increase in patient volumes, some simple math shows that the volume increase needed to break even would be substantial.  For a typical company, volumes would have to increase roughly 3-5% just to offset the tax from a profit perspective.  Obviously, the break even sales increase required would depend on the company’s margins and situation.  Many companies have undoubtably already done the analysis.

The Massachusetts experiment with healthcare reform also offers some other insights.  According to a recent NY Times article (Mass. Aims to Cut Growth of Its Health care Costs, July 31, 2012), Massachusetts is struggling with some of the highest healthcare costs in the nation and is looking to implement a number of measures to save $200 billion over the next 15 years. Eventually, many of these measures are likely to translate into more pricing and value pressure on med-tech companies.

What do these insights from Massachusetts potentially mean for med tech companies on a national level? The tax on sales of 2.3% combined with a lack of offsetting volume increases means margins will likely erode.  If you add in other cost control mechanisms like accountable care organizations (ACOs), this will put even more pressure on med tech companies.  Combine these factors with other efforts to assess value like comparative effectiveness, and you have a potential big squeeze on med tech companies’ profits.

Avoiding the squeeze on profits won’t be easy.  For prepared companies, there is a chance to be smart about managing pricing and value going forward to help avoid the squeeze.  This will require:

  • A more holistic view of pricing and value
  • Being smarter about managing pricing and value from the innovation decisions that are made all the way through to rethinking how the sales team is prepared to communicate and negotiate value
  • New thinking on the business models and offering strategy to take advantage of opportunities with Accountable Care Organizations and other parts of healthcare reform

For clever companies, healthcare reform could actually be an opportunity.  Unfortunately, for unprepared companies, it will likely be a squeeze on margins, jobs, and innovation.

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