It’s been flu season in healthcare since 2008. Is the healthcare system showing any signs of recovery?
That’s the question Joanne Wuensch, Managing Director-Equity Research for Medical Technology at BMO Capital Markets asked in her 2012 Medtech Outlook report on January 4, 2012.
Her conclusion, while the patient is still coughing and hacking, there are clearly hopeful signs.
The “Discretionary” Spending Flu
Once the recession was in full force in 2008, it was clear that the U.S. Healthcare system in general and orthopedics specifically had caught the discretionary spending flu.
For example, in the annual report of National Health Expenditures (NHE) published in the January 2012 issue of the journal, Health Affairs, analysts pointed out that while U.S. health care spending did increase in 2009 and 2010, it was at historically low rates. The writers pointed to high unemployment and the loss of private health insurance as principal factors behind a lower rate of spending growth. Since the recession began in 2008, many Americans chose or were forced to delay or forego medical treatment. Since 2008 orthopedic treatment has become, for many patients, an increasingly discretionary expenditure.
CMS (Centers for Medicare and Medicare Services) reported that U.S. health care spending grew 3.9% in 2010 to $2.6 trillion or $8, 402 per person, which is just 0.1 percent point faster than in 2009. That’s the lowest rate of increase in the entire 51 year history of the NHE. It also reflects a lower rate of health care services and product utilization than in previous years.
“It’s absolutely clear what’s going on, ” said William Galston of the Brookings Institution in a Reuters story. “People’s budgets have been hard-hit, and even if they have 20% co-pays from their insurance companies, that 20% may still be too much.”
Hospitals also caught the discretionary spending flu. According to the CMS report, hospitals revenues grew but, for the fourth consecutive year, at an ever slower rate as consumers postponed medical care—even at emergency rooms. Not surprisingly, individual physicians and small clinics also reported that they experienced in 2009 historically low rates of revenue growth.
Getting Out of Bed
Sometime in 2010, the health care system began to show signs of getting out of bed. While spending on health care services and products in 2010 grew at historically low rates, the U.S. economy as reflected in gross domestic product (GDP) did appear to rebound—growing 4.2% over 2009. That did offer some support for health care spending which, by the end of 2010, was 17.9% of the overall economy and unchanged from 2009’s level but still up 3.4x from the 5.2% share reached in 1960.
Furthermore, 2010 wasn’t a bad year for insurers. In 2010, the net cost of health insurance—which includes the overhead and insurance company profits—increased by 8.4%. Insurance premiums grew faster than benefits for the first time in seven years.
Other signs that the health care system is starting to recover from the recession flu were:
Out-of-pocket spending by consumers increased 1.8% in 2010, accelerating from 0.2% growth in 2009.
The federal government financed 29% of the nation’s health care spending in 2010, an increase of six percentage points from its share in 2007 of 23%. Part of that increase came from enhanced Federal matching funds for State Medicaid programs under the American Recovery & Reinvestment Act which expired in 2011.
Medicare spending grew 5.0% in 2010 which, while down from the 7.0% growth rate in 2009, was still in positive territory.
Hospital spending, which accounted for roughly 30% of total health care spending, grew 4.9% to $814.0 billion in 2010, compared to growth of 6.4% in 2009.
Physician and clinical services spending, which accounted for 20% of total health care spending, grew 2.5% to reach $515.5 billion in 2010, slowing from 3.3% growth in 2009.
Private businesses financed $534.5 billion, or 21% of total health spending in 2010, down from a 23% share in 2007.
So where does this leave the healthcare system heading into 2012?
Still Coughing and Hacking
Wuensch writes in her 176-page report that many of the pressures on the medical technology industry are well known. “Concerns run the gamut from lower patient volumes, higher pricing pressures, delayed FDA process (and with it delayed product approvals), a declining euro and a more difficult foreign exchange environment, an enhanced summer seasonality (as physicians, now employed by hospitals, took vacations), RAC [Recovery Audit Contractor] audits (that increase paperwork, slow down procedures, and curtail perceived overutilization), and the 2013 medtech tax.”
She says the Medtech patient can improve if we have an economic recovery that improves procedural volumes. She also believes some merger and acquisitions; a slowing of physician migration to hospital practices; and a repeal of “ObamaCare” and the medtech device tax would help the industry.
She notes that since small manufacturers are hurt more by the new device tax than large manufacturers, the tax provides an added incentive for an acquisition.
Immediate Cure is “Wishful Thinking”
However, Wuensch says that while an economic recovery should ease the downward trend in volumes:
“This may simply be wishful thinking. While individuals are likely delaying procedures given the economy, either because they are unemployed and have lost health insurance or they are afraid of taking time off work and putting their job at risk, other dynamics may be at work here.
It is possible that, during the days when new technology was more frequently being introduced, younger and younger patients were implanted with devices, pushing the average age well below the over 65-year-old crowd, leading to a gap in the available pool (one that could potentially remain until a replacement product is necessary).
It is also possible that when insurance was readily available and co-pays and premiums were relatively low, individuals were more willing to take the dive into the patient pool, a dynamic that has changed as medical procedures have shifted toward more consumer discretionary events.
Last, but certainly not least is the increasing number of negative news articles (either by the lay press or clinical journals), the miscellaneous Department of Justice inquiries, or FDA product recalls. For example, we believe few anticipated the negative literature siege on Medtronic’s Infuse BMP product that wound up in The Spine Journal in June, 2011.”
But Eventually Doing the Cha-Cha
However, Wuensch added, “If we can think past 2012 the demographics of the aging boomers start to really kick in, and R&D investments should bear fruit at some stage.”
What will the next three to five years look like?
Source: Population Division, US Census Bureau.
From 2010-2015, this boomer population segment (65 and over) is expected to increase to 47 million people from 40 million, an increase of 16%, compared to the 3% increase of the under-65 cohort. Roughly 1.3 million people will turn 65 each year between now and 2015. Further, census estimates calculate that the aging trend of this demographic should likely run for another five years after 2015, before growth rates peak in 2020 and slowly begin to taper off afterwards.
We note another factor that could significantly impact procedure volume levels. If the new health care law survives a constitutional challenge and the 2012 election, tens of millions of uninsured patients will now have coverage.
Orthopedic Pricing and Volume
Looking specifically at orthopedics, Wuensch says it has been half a decade since the hip and knee markets were at their peak, capturing price premiums, and logging volume growth leading to double-digit growth rates.
Even with U.S. unemployment remaining high, European austerity, higher co-pays, fewer insured, surgeons moving to work for hospitals, and a more difficult hospital purchasing environment, eroding pricing appears to be stabilizing, said Wuensch. “Importantly, hospitals continue to pay for innovation, with Zimmer management noting on its 3Q11 call that recently introduced innovative products continue to deliver strong sales and premium pricing.”
While volume remains soft, she noted Biomet management’s comments during a recent call with analysts where company CEO Jeff Binder said, “I don’t believe that all of a sudden in a couple of quarters, all these patients are going to just show up at the door and we’re going to have some tremendous boom, but I do think that this pent-up demand will release itself at some point over time…We see it improving. We see it improving probably more gradually over time than overnight. And we know that those high-single-digit volume growth rates have been there in the past, and I absolutely expect that ultimately, they’ll be there in the future.”
Hips, Knees, Spine and Extremities
With manufacturers not yet having reported final 2011 sales, Wuensch projects a U.S. hip market growth rate down 0.1% in 2011 versus a 2.3% increase in 2010. In 2012, she is looking for U.S. sales to pick up slightly to 1.1%, and increase 1.3% in 2013.
In knees, she expects 2011 to be up 1.9%, while her 2012 reported growth rate estimate is up 0.3% and in 2013, up 0.8%.
Source: Company reports and BMO Capital Markets estimates.
Source: Company reports and BMO Capital Markets estimates.
Wuensch says the spine market appears to be stable, with price pressures largely offsetting volume increases and mix benefits, trends that she expects to continue. For the spine market, she forecast that the 2011 market growth rate will be 1.7% or a step down from 1.9% in 2010, stay at that level in 2012, and rise to 2.1% in 2013.
While growth rates in extremities are still in the double digits for some companies, Wuensch notes the market slowed in the first nine months of the year and 3Q11 reports call into question the long-term growth potential of the market. The U.S. market was particularly weak during the quarter. Thus, Wuensch says the fourth quarter will be a key indicator as many will be looking for signs of health.
So there is “Dr.” Wuensch’s diagnosis of orthopedics and her prognosis for 2012. Cautious, realistic, but at its core, hopeful.
