What caused the big uptick in knee and hip procedures in the fourth quarter of 2013? Was it Obamacare, demographics, economic recovery or just normal seasonal fluctuations?
A couple of Wall Street analysts, Joanne Wuensch of BMO Capital Markets and Glenn Novarro of RBC Capital Markets, tried to find out.
“Pull-Forward” Theory
Analysts had projected for some time that procedure volumes would increase after passage of the Affordable Care Act (ACA, aka: Obamacare), as millions of newly insured patients now had money to pay for hip and knee replacements. Some even conjectured that there would be some procedures ahead of the implementation of the law, the “pull-forward” theory.
During the quarter, knees were up 6.9% while hips rose 4.2%. This was a sharp uptick from the previous year’s fourth quarter when sales only rose 2.8% and 1.6%, respectively.
Wuensch says that 2013 was an anomaly as each quarter’s growth rate improved sequentially. Normal seasonal patterns in orthopedics show the fourth quarter to be the strongest, followed by a step down in the first quarter, then second quarter to a trough in the third.
For example, in the knee market, where procedures have been easier to delay during the economic downturn, the growth rate increased from 1.7% in the first quarter of 2013 to 2.0%, 4.0%, and finished the year at 6.9%.
“Pull Forward” v. Market Recovery
“Now herein lies the question, ” wrote Wuensch on February 11, 2014. “How much of the strength comes from a pull forward in volumes associated with ACA implementation (unsure of their insurance, patients came in before the change in coverage), and how much is based on true, sustainable end-market recovery.”
According to orthopedic device management commentary with analysts during quarterly conference calls in January and February, in-patient procedures and lab tests have remained essentially flat, but the orthopedic market has recovered. “What does this tell us?” asked Wuensch.
BMO Capital Markets Physician Survey Says – Obamacare
To find out, Wuensch and her team reviewed management commentary and conducted a physician survey (n=26) to take their view of the implementation of the ACA and patient behavior.
They asked physicians how they expect patient volume to change with the implementation of Obamacare.
Here were BMO’s survey results:
- 27% do not expect ANY change in patient volume associated with the law
- 31% experienced increased volume AHEAD of the implementation
- 0% reported a decrease in volume AHEAD of the ACA
- 27% expect to experience an increase in volume AFTER implementation
- 15% expect to experience a decrease AFTER implementation.
Then physicians were asked about patient behavior in the fourth quarter and the first month of 2014 due to the ACA.
- 52% reported no change
- 44% said they treated more patients than expected during pre-ACA implementation
- 4% said that they saw an increase in January 2014.
Seventy-three percent (73%) of responding physicians said they saw a change in patient behavior in the fourth quarter of 2013, while 27% said they saw no changes.
ACA Changes and Pent-Up Demand
Possible explanations offered by the physicians for patient behavior changes included:
- 35% associated with ACA insurance changes
- 27% pent-up demand
- 12% an improvement in the economy.
Wuensch threw a grain of salt into the survey by citing a recent report that said studies show that 50% of physicians “have no idea” about the Affordable Care Act.”
She believes that two movements are afoot.
First, patients who do have insurance, but were concerned about insurance changes, were “pulled forward” into the physician’s office creating the strong fourth quarter.
Second, patients that have not had insurance, that now have it via insurance exchanges, will set up stronger patient volume in the first quarter of 2014.
RBC Capital: Obamacare Concerns
RBC Capital’s Glenn Novarro also conducted a survey of 51 U.S. orthopedic surgeons to better understand the sustainability of U.S. hip/knee volume growth in 2014.
“We believe the pick-up in U.S. hip/knee volumes was likely driven by a combination of factors including favorable demographic trends, normal-year end seasonality as patients rush to have surgeries done before deductibles are reset, and patients that previously delayed surgeries returning to have surgeries done.
Novarro also found an additional dynamic that occurred in the second half of 2013 as approximately 73% of the surgeons saw a pull-forward of hip/knee procedures, due to Obamacare concerns.
His surgeons estimate that U.S. hip/knee volumes will be lower in the first quarter of 2014 than the fourth quarter of 2013 believing the surgery volumes in their practice would on average be down approximately 3%, sequentially.
Novarro believes there will be about a 4% sequential decline.
Reasons cited by surgeons for the expected sequential decline included a reset of deductibles, changes in insurance coverage, and weather. Separately, approximately 47% of surgeons who saw a pull-forward of procedures in the second half of 2013, say they are still working through this backlog in the first quarter of 2014.
Device Chiefs Speak
But ultimately, the device companies that have to predict how many orthopedic devices to manufacture for upcoming quarters get the last word about the reasons for the uptick. Wuensch summarized management comments from the top orthopedic companies during recent calls with analysts.
Biomet: “Overriding Power of Demographics”
Biomet Inc.’s management said that everyone has seen anecdotal reports of patients wanting to get their procedures done before the turn of the calendar. The company is “cautiously encouraged” by those reports as they speak with their distributors and surgeons and we ask about their schedules. The surgeons say they’re “pretty considerably” booked out and their waiting times are longer than what they remember.
Company CEO and President Jeff Binder said on January 8, 2014, that his “test theory” has less to do with any early impact of people gaining insurance because he hasn’t seen any numbers that show that being a “very large group of people quite yet.” “It seems to me, ” said Binder, “that as the economy gets better, as it [is] sustained, as people become more confident, more secure in their jobs, the only real successful end-stage solution for osteoarthritis is a joint replacement. At this point…I just think there’s a lot of people out there who have been putting off these procedures…the combination of that pent-up demand and what I would call just the overriding impact and power of demographics…the population has still been ageing…you put that all together, and I think we’re hopeful that there’s some sustainability to the increases in volume that we’re apparently seeing.”
Johnson & Johnson: “Significant Opportunity”
Alex Gorsky, Johnson & Johnson’s CEO, said the industry will have to watch the ACA and its impact in the U.S. closely given the lower assumption and projections about new numbers of patients recently put out by the Congressional Budget Office. “If you look at their assumptions and projections about numbers of patients, they’ve been reduced substantially, based upon sign-up rates.” He does expect “some assistance” from the sign ups, but probably not at the rate that was earlier projected.
But overall, Gorsky said on January 21, 2014, his team at DePuySynthes is “cautiously optimistic” regarding the fundamentals of some of the orthopedic markets. “Longer term, we still think they represent a very significant opportunity.”
Zimmer: “Aging Population – Terrific Clinical Results”
Dave Dvorak, Zimmer Holdings, Inc.’s president and CEO, and also chairman of the industry’s trade association, AdvaMed, said on January 30, 2013, that anecdotally, “there’s an element of [the] procedural uptick is driven by the implementation of healthcare reform and some of the perceived potential disruption to plans or access to particular surgeons…”
But he doesn’t think it’s very easy for anyone to tease that apart with precision at this point. “Part of what one should take away from the uptick in procedural demand is back to the fundamental demographic drivers…an aging population…procedures that have terrific clinical results. And relative to the need for joint replacement, the procedure is still underutilized and economically very beneficial to society…this [fourth quarter] performance within the market and the procedural demand ought not to be over-emphasized in developing a mindset that’s a trend going into 2014.”
Ultimately, he believes that the trailing four quarters are more representative of what the market will be in 2014.
Smith & Nephew: “Unknown Consequence of Obamacare”
Finally, the management of Smith & Nephew watching the unfolding of the ACA from England, believes the fourth quarter market was artificially high due to the “Obamacare misunderstanding” and will not be as good in the next quarters.
Company CEO Olivier Bohoun told analysts on February 6, 2014 that he thinks people wanted to use their insurance before the end of the year. “I’ve talked with many surgeons in the U.S. and they all said, yes, we have done lots of things this quarter, so it’s especially high. So that’s why I’m always cautious about extrapolating this type of growth…we don’t see the market changing, so I think it will be, as we have mentioned before, a low-single-digit market.”
He is convinced that the uptick was mainly the anticipation of surgery due to the unknown consequences of the Obamacare. “Maybe I’m wrong, but that’s what I strongly believe.”
2014
Teasing out the specific reasons for the big fourth quarter uptick was hard. But physicians and device leaders generally agreed that baby boomers are aging and orthopedic procedures have economic value for people’s health, the economy is improving and the unknown of the massive insurance reform of Obamacare impacted patient behavior.
We’ll all find out in April if the orthopedic chiefs are good predictors about surgeon workload for the rest of 2014.
