Medicare Cost Cutting, Managed Care Imperil Earnings of Small Medical Device Companies


In the good old days of medical research (up until 1994 or so), hospitals billed Medicare and private insurance companies for clinical trials of new medical devices. Reimbursement meant that established medical device companies as well as upstarts could reasonably be assured of enough cash to get their products on the market.

But times have changed. Medicare, the insurance program for the elderly, has tightened up on funding such trials and many hospitals have backed away from participating in new studies fearing that they won't get reimbursed.

As Congress and the White House reengage in their battle to balance the budget, it's clear to all participants involved that providers of medical services (and hospitals are the biggest providers) are likely to get hammered. Medicare is one of the fastest rising government expenses and reducing the rate of increase in fees to hospitals, doctors and other providers is virtually certain.

Given that outlook, many hospitals are at best reluctant to engage in seemingly unnecessary and expensive trials for devices even though they may save lives and dollars down the road.

At the same time, private managed health care companies are clamping down on their payments to hospitals. Employers are looking for the cheapest health plans they can find and managed care companies, in turn, are cutting back on how much they reimburse hospitals in order to reduce premiums.

Given the current tenor of the budget debate and the relentless cost cutting that managed care companies expect of hospitals, many medical device makers are looking abroad to conduct trials. Companies such as EP Technologies, Cyberonix and Target Therapies, which are researching treatment for cardiac arrhythmia, epilepsy and strokes, respectively, devote substantial sums to funding clinical trials. Clearly the time and money needed to get the devices they are developing on the market will take longer if they have to shift trials abroad.

Bottom line: trends in Medicare reimbursement and managed care will make it more difficult for the next hot medical device maker to emerge.

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