Moody's: Med device makers count on fiscal tools to compensate for sluggish sales

Medical device makers are counting on financial stratagems—buybacks, dividends, acquisitions and the like—to keep shareholders happy in the face of flat sales figures. The drop in demand owes in large part to belt-tightening at hospitals, tougher approval procedures at the FDA, declining medical coverage under health-insurance plans and a weak global economy.

So notes a year-end report on U.S. medical products and services from Moody’s Investors Service.

While primarily aimed at investors, the report offers forecasts of interest to general healthcare watchers, as well as medical equipment-service professionals and healthcare technology managers:

• With unemployment high and consumer confidence low, Americans will continue to curtail physician visits and postpone non-urgent surgeries and diagnostic procedures. Companies that produce products used in elective procedures “will continue to be particularly vulnerable to a slowdown in demand,” said Moody’s.
• Demand for healthcare services tends to be more resistant to economic pressure than other consumer-driven sectors, but it is not immune. What’s more, changes in health-benefit plans designed to shift more of the rising cost of healthcare to employees “will continue to limit consumers’ use of healthcare services even as the economy improves,” the report stated.
• Rated nonprofit hospitals saw median growth rates for hospital admissions, outpatient surgeries and outpatient visits decline during 2010. (Nonprofit hospitals represent about 85 percent of the nation’s acute-care hospitals.) “We believe these slow growth trends will continue,” said Moody’s.
• U.S. hospitals are increasingly coordinating with physicians to cut costs, particularly for relatively high-price medical devices, such as stents, ICDs and orthopedic implants.
• Device makers have relied on product innovation to sell premium products that can garner higher pricing than existing products. “We believe that it will become tougher for this strategy to succeed,” said Moody’s. “That’s because the FDA’s approval processes are becoming more stringent and because cost-conscious hospitals and other customers will become more discerning” in evaluations of new products’ cost-effectiveness.

“Reimbursement pressures from primarily government (Medicare and Medicaid) but also commercial insurance payors will continue to fuel the need for U.S. hospitals to reduce costs,” the report predicted. “Based on trends among the nonprofit hospitals we rate, revenue growth rates hit an all-time low of 4 percent in 2010. For-profit hospital operators’ trends have been similar. Amid federal debt-reduction initiatives, which are likely to target hospitals for cuts, pricing pressure on device makers will increase.”

To read the full report, click here.