Ernst & Young: Med tech markets relatively flat, excise tax won't help
High unemployment, increasing enrollment in Medicaid and an otherwise dismal economy have affected the medical technology market, according to a recently released Ernst & Young (EY) report, “Pulse of the industry: Medical technology report 2010.” With uncertainties ahead, the authors wrote, many hospitals are holding onto their dollars.

Combined revenues of U.S. and European publicly traded medical technology companies changed little in 2009 over the year prior, increasing by only 0.3 percent to $294.1 billion. Non-conglomerate revenues were up only 0.9 percent that year and conglomerates were down 0.7 percent. The year prior, in 2008, the market experienced 11 percent growth, according to the report.

“The revenues of U.S. publicly traded medical technology companies fell short of the $200 billion mark in 2009, sliding to $196.7 billion, a 0.1 percent decrease from 2008,” the authors wrote. “This slight year-over-year contraction comes on the heels of an 11.2 percent growth rate in 2008 and is the first time the U.S. industry has experienced a revenue decline since at least 2004.”

Overall, from 2008 to 2009, non-imaging diagnostics increased revenue by 2.1 percent, therapeutic devices increased by 1.9 percent, while imaging was down 5.5 percent and research and other equipment was down 3.4 percent, according to the authors.

The EY study cited an April 2010 American Hospital Association (AHA) survey that reported 70 percent of hospitals with lower patient volumes and 72 percent with reductions in elective procedures. While unemployment hovered around 10 percent, hospitals noted increased patient enrollment in Medicaid and 90 percent reported an increase in uncompensated care. The result: Hospitals are being cautious about big expenditures, noted EY.

“While these cutbacks affected all product classes, from low-end to premium products, capital equipment faced the greatest obstacles. The AHA reported that hospitals’ capital expenditures would experience lower growth rates or even declines in revenue for the foreseeable future,” the report stated. “Of course, hospitals cannot defer capital spending indefinitely without potentially weakening their competitive position and impacting quality of care.”

For medical technology companies in the U.S., net incomes increased by 4 percent in 2009, according to the report, and more than two-thirds of public companies improved their bottom lines. If the economy experiences growth, industry analysts predict the medical technology market will grow as well.

“The med tech industry should continue to gain more clarity on its near-term financial prospects throughout the remainder of 2010 and into 2011. As the global economy continues to slowly grow out of the recession, we anticipate that business conditions will improve for the industry,” the authors wrote. “Providers and patients should begin to increase their spending levels, and emerging markets will unquestionably offer expanded opportunities for growth.”

On the horizon: Medical device excise tax
Although a 2.3 percent excise tax on revenue of medical device manufacturers won’t take effect until 2013, researchers attempted to approximate its impact had it been imposed on 2009 revenues. For 98 profitable U.S. non-conglomerate public medical technology companies, had the tax been implemented that year, they would have paid $973 million after taxes, decreasing net income by 7.5 percent.

“Surprisingly, only four of the 98 companies would have seen their bottom lines turn red. The 96 med tech companies that had revenue but were not profitable would have been subjected to the full 2.3 percent of the tax and would have been responsible for paying approximately $146 million—a 4.7 percent increase in their net loss,” the authors wrote. Larger companies will take on bigger portions of the tax each year, according to EY, but it may yet delay profitability for smaller players during times of financial and regulatory pressures.

In a separate article included in the report, author Chris J. Ohmes of Ernst & Young noted many challenges associated with the upcoming excise tax.

“As part of healthcare reform, the U.S. Congress adopted a new excise tax on domestic medical device sales. Merely creating the systems and procedures to ensure proper compliance with this new tax will be demanding, but determining how to respond to the tax will be even more complex,” wrote Ohmes. “When implemented, the newly enacted medical device excise tax likely will result in substantial economic dislocations within the medical device manufacturing industry.”

The 2.3 percent tax will be imposed upon medical device sales, leases and rentals for human use in the U.S., and imports are also subject to it. Export sales are exempt, as well as sales for use in further manufacturing, noted Ohmes.

“Given that almost half of all domestic medical device sales are associated with medical services paid for by Medicare and Medicaid, and that patients of either the Veterans Administration of the Department of Defense are substantial users of medical devices, it is unlikely that the tax will merely pass through customers,” wrote Ohmes. “Indeed, it will be difficult to assess how much of this tax can be passed along to customers in the form of higher prices.”

The tax also may encourage manufacturers to push higher prices on their suppliers, or they may also try to unbundle products with multiple components to limit the definition of a medical device.

For more information about the medical technology market, the EY report can be found here.