If 2009 was the year of recovery, will 2010 be the year of decline?
New federal legislation will pass which changes many rules of the current health care eco-system. There will be new taxes enacted. Medicare will start a period of procedure reimbursement decline. The FDA “tax” is rising at an increasing rate. Let’s just slit our wrists now.
Or, maybe not.
I know one thing after 27 years of forecasting sales, earnings, and medical technology trends. Whatever we collectively think will happen in the near future, is mostly wrong. We all look forward through a rear view mirror. One year ago, we looked at 2009 through the prism of a near financial collapse on Main Street, Wall Street and our street. In just 15 months (between October 2007 and December 2008) we’d collectively lost about $10 trillion of wealth from bank accounts, balance sheets and stock accounts in the United States. At this time last year we were staring down a global financial meltdown, no working capital credit, hospitals which couldn’t meet payrolls and patients who were losing jobs and healthcare coverage at rates not seen since the 1930s. The effects of the colossal real estate and credit bust, the near global financial panic and the rubble of a bombed economy made the prospects for 2009 look good only in comparison to 2008.
Yet, 2009 wasn’t so bad:
- Orthopedic reported sales growth will reach about 7.0% in 2009
- Orthopedic company stock prices increased 21% or $49.9 billion in 2009
- Hospital revenues are expected to increase 13.4% in 2009 according to a consensus of Wall Street analysts.
- Insurance company revenues are expected to increase about 4.55% in 2009 according to a consensus of Wall Street analysts.
Not exactly doom and gloom.
What will happen in 2010? Here are some safe guesses.
- More patients will come in for orthopedic care
- More operating rooms will be built in the United States
- More products will be sold
- Less money will be available to pay for treatment
- Fewer new technologies will come to market in the United States
But, more profoundly, 2010 may be the beginning of the greatest change in United States healthcare in a generation. In 2009, political forces joined with existing and, in my opinion, vastly more powerful market forces to put in motion powerful changes to this system.
Even in this paradigm, the financial collapse of 2007 and 2008 gave political back bone to the effort to reduce spending on medical devices (unfortunately, new technologies as well) and drugs. It also fueled the often misguided righteous indignation of the press and federal attorneys over physician-industry consulting relationships.
As we begin 2010, here are some foundational statistics:
- $2.5 trillion was spent on healthcare in 2009 or $8, 160 per U.S. resident (Centers for Medicare and Medicaid Services[CMS]). In 1970, U.S. health care spending was $75 billion or $356 per resident.
- Healthcare spending in 2009 accounted for 17.6% of U.S. GDP. In 1970 it was 7.2% of GDP.
- Healthcare spending has risen about 2.4 percentage points faster than GDP since 1970. At this rate, according to CMS, healthcare spending will be $4.3 trillion or 20.3% of the U.S. GDP by 2018.
- Spending by private health insurance comprises 64% of private health expenditures; 22% of private expenditures is out-of-pocket payments by individuals; the remainder (14%) is expenditures by other private sources (e.g., philanthropy).
- CMS is projecting that the private share of national health spending will fall to 49% by 2018, with public spending growing to 51% as the oldest baby boomers become eligible for Medicare.
To be sure, the healthcare industry is a highly attractive one. It is clean, high paying and drives growth in knowledge workers.
Change is in the air. Looking forward to a new healthcare framework, what will likely be the four-by-eights of a new healthcare post and beam structure?
More government – When more government means more patients, this is good news. When more government means more expensive and longer approvals, this is bad news. When more government means more data from which to analyze markets, outcomes and areas of inefficiency, this is good news. When more government means more heavy handed interference in the practice of medicine (as in deciding which therapies are best for which patients) this is bad news. In short, there will be more government and it will be both good and bad news for the healthcare eco-system.
Comparative effectiveness – While CE will be the mantra, the REAL debate will be whether technology evaluations are market-driven or governmental/quasi-government driven. Manufacturers won’t support a non-market-based system—but hospital and insurance companies are looking for a counter weight to the current marketing driven system. For example, medical implants and devices that consume more than 50% of a case will be placed under the CE microscope by reimbursement agencies and providers.
Cost and risk – Cost and risk is shifting from Medicare to non-government entities This trend is occurring across several fronts. At the state level governments are cutting back reimbursement for indigent or non-healthcare reimbursed patients. At the federal level, significant Medicare cuts are coming. At the private payer level, such risk reducing policies as “pre-existing conditions” are going away.
Lower operating margins – Lower operating margins among orthopedic implant manufacturers and pricing pressures combined with a chaotic and much more expensive FDA will, we estimate, likely push the current level of operating margins among orthopedic manufacturers down 200-300 basis points.
Total payments – Total payments for services and products will continue to shrink. No matter the source (government, commercial insurance, or directly from patients) less money is available to hospitals and other healthcare providers which means a renewed emphasis new staffing schemes, changing patient admittance criteria and changing purchasing patterns.
Consolidation – Mergers, hospital-practice acquisitions and employing physicians, joint ventures, and other physician/hospital consolidation strategies will become the major strategic and operational activity among providers and insurance companies.
Information technologies – Information technologies like electronic health records, PACs, and other applications may be delayed due to costs. That, in turn, will further spur the urge to merge since those providers that have already made the investment in data driven and streamlined operations will be able to monetize those investments by applying them to less sophisticated operations.
Hospitals – Hospitals will try to expand services in many cases in partnership with physicians. Savvy manufacturers (note Stryker’s purchase of an equipment reprocessing company) will facilitate this trend since it delivers new sources of revenue and profits to hospitals and, therefore, physicians.
Compensation – Compensation levels are declining for surgeons, administrators and sales people. Only nurse practitioners and primary care physicians seem to be immune. More and more, the compensation debate seems to be about “appropriate” levels of compensation for insurance executives, hospital administrators, surgeons, sales people, and manufacturer executives. Unfortunately, that appears to be the leading indicator of declining resources.
Medicare – Medicare will grow and shrink simultaneously. The number of patients covered by Medicare will grow. The amount of reimbursement available per patient will likely decline.
New Technology – The FDA’s ever rising timelines and demands combined with CMS’s reluctance to reimburse new technology is seriously hurting the ability of companies to justify new technology development and commercialization. These trends are also reinforcing a regression to the lowest common designs since these appear to be the only ones that regulators will consider.
Leaving the U.S. – The numbers of patients, entrepreneurs and physicians who are leaving the United States will rise in 2010.
Diminished Scrutiny of Physician Payments – This may not be politically correct, but we think the focus on physician payments is declining. While certain institutional transparency rules have been put in place, the urge to prosecute or investigate is waning.
Finally, in terms of manufacturer stock market valuations, we think 2010 will be a mostly flat year. All participants in the orthopedic industry’s eco-system are entering a year of heightened risk and change. As a result, the discount rates being applied to orthopedic equities combined with declining operating profit margins will, we think, counteract higher sales growth to keep overall valuations flat.
