The Minute: Volume 12 Issue 2 - Winter 2013

Post-Election Impact on Healthcare Spending The ACA (Affordable Care Act) imposes a 2.3% tax on medical devices beginning in 2013. It is projected to collect nearly $30 billion over the next decade from taxes on medical equipment. The medical device and diagnostics indus-try reacted strongly against the ACA, with some firms threatening layoffs and offshoring if it were enacted.

The Obama administration argues that the tax will not shift jobs overseas because equipment produced overseas and imported into the U.S. will be taxed as well (though it wouldn’t apply to equipment both produced and sold overseas). According to the Treasury Department, hospitals and medical technology companies will actually benefit from the law. Though the 2.3% tax will impact the industry, the department argues that the millions of newly-insured health care customers as a result of the ACA will increase the demand and lead hospitals to order more equipment which will in-crease medical device companies’ revenues.

To assess the expected impact of ACA, TMTG interviewed four hospital executives to discuss how they anticipate im-plementing and modifying their strategies in light of the election results. Their discussion sheds light on what hospitals will value most from their suppliers in the coming year.

CASE STUDY:Price Optimization Strategy for the Market Leader

The Company: A dominant market-leader in medical device was challenged to identify an optimal pricing strat-egy for a new product launch in an increasingly competi-tive market. Nearly $1B in business was at stake.

The Challenge: Understanding the customer purchase decision process and non-product pricing attributes such as lease-vs.-buy and maintenance plans. There was also internal debate about the objectivity of the Client’s own sales force perspective.

Our Solution: A combination qualitative and quantitative study. In-Depth Interviews provided objective assessment of buying decision factors and a quantitative survey was used to develop a market simulator to represent real-world market movements.

The Impact: TMTG created two pricing models that pro-vided the client with price points that would maximize its profits or its market share. http://www.themarketechgroup.com/doc/device_diagnostics/casestudy_81.pdf

To find out what The MarkeTech Group consultants can do for you, visit our Website at www.themarketechgroup.comUSA: +1 (530) 792-8400, EU: +33 (0)2 0 72 01 00 80

Winter 2013VOLUME 12, ISSUE 2

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Laws & Regulations: Medicare Will Change Product Value Propositions

Hospital Value-Based Purchasing (VBP) is trying to address the more than $4 Billion Medicare cost associated with the one in seven Medicare patients that experience adverse events while in the hospital and the 98,000 patient deaths associated with hospital errors annually. Over the next few years, Medicare payments will be reduced in the event of:

• excess 30-day readmissions for patients with heart attacks, heart failure, and pneumonia

• ineffective use of information technology to deliver better, safer, more coordinated care

• high rates of certain hospital acquired conditions in-cluding infections

Facing these reimbursement impacts changes the hospital economic value equations for devices and products that re-duce readmissions, minimize nosocomial infections, and im-prove hospital IT systems. Products, software, and services that can demonstrate improvements in these areas will be able to support a premium price.

Highlights

At Stake!

So What?

Hospital Case Mix Index is expected to change, with more medical and fewer surgical cases, negatively impacting hospital cost structure.

Compatible IT systems are perceived as potential-ly the most valuable investments in the near term.

Manufacturers will have to find ways to help hospitals cut costs.

Money-losing specialties may be dropped to focus on delivering the community’s safety net needs.

Hospital Executives desire stronger partnerships with vendors that are empathetic to their need to provide continued quality care at lower costs.

Vendors that can provide rapid repairs and high up-time will be most valued.

THE ASSOCIATE CORNER: How the 2.3% Excise Tax Impactsthe Medical Device Industry

The 2.3% excise tax on sales (sales, not profits) of medical device companies will likely have a negative effect on the medical device industry. This tax will have a disproportionate effect on early stage companies.

Larger, cash generating device companies will have lower profits, unless they are able to charge customers 2.3% higher prices for their products. Since providers will receive lower reimbursement from government payers, this will likely be difficult. In all likelihood, more patients will be covered by government payers.

Assuming corporate earnings are lower, share prices of the large medical device companies will eventually adjust downward (if they have not already done so). With lower profits, the large companies will have less cash. Lower share prices and less cash will force these companies to negotiate lower prices for the smaller companies (some funded by venture capital funds) they wish to acquire. Many medical device companies have already implement-ed layoffs and cut planned capital expenditures to preserve cash.

Early stage companies with product sales will also pay a tax of 2.3% on sales. Their profits will be lower, and their needs for outside financings will increase. A successful medical device company with revenue might gener-ate net after tax (NAT) profits of 10%. The additional 2.3% tax will represent a 23% decrease to this NAT. Device companies will have less cash for R&D, clinical trials, manufacturing expansion, and sales and marketing.

Proponents of the Affordable Care Act (ACA or ObamaCare) sold this 2.3% tax on the premise that more individ-uals would have insurance coverage, so device sales would increase. Only time will tell if this happens. There are many complex factors yet to be decided (the structure of government run health insurance exchanges, payment levels for various procedures, decisions by employers to continue current coverage or pay a penalty, etc.), so it is nearly impossible to predict what will happen to procedure volumes. Only the passage of time and the making of decisions on the details of the multivariable ACA will determine what happens to the number of procedures.

Accountable Care Organizations will continue to purchase innovative, new medical devices that have been proven to reduce overall costs. Better clinical outcomes alone might not be sufficient to abet product adoption in this even more cost sensitive environment that the ACA will create. I recommend that early stage companies incorpo-rate cost effectiveness studies in clinical trials.

In the short to medium term, I see no tangible benefit to early stage medical device companies. I predict that venture capital funding for the medical device sector will decline. Entrepreneurs seeking capital for startup medical device companies will face stronger headwinds. An industry which already faces a difficult regulatory environment and stringent requirements for reimbursement will become more challenging because of the ACA.

Fred Dotzler, Managing Director, De Novo Ventures

Hospital Executives Speak Out - How U.S. Presidential Election Outcome Im pacts Health Care Spending

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HOT TREND

ON THE HORIZON: What Hospitals Need From Vendors

INT

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VIE

WRoundtable Panelists:

Max Owens, CFO Morristown-Hamblen Healthcare System, Morristown, Tennessee Al White, CFO, Broadlawns Medical Center, Des Moines, Iowa Gerry Durney, COO, Atlantic Health, Morristown, New Jersey Gary Bebow, CEO, White River Health System, Batesville, Arkansas

Q: Over the last six to 12 months, TMTG has heard from numerous hospital executives and administrators that hospital investments and strategic plans have been in a holding pattern until the outcome of the presidential elections are known. How well does this mirror your hospital’s sentiment and plans concerning the election?GD: This election, cost is coming out of the system. We really have to offset our cost curve. Margins are going to be key. We have to come up with very creative ways to change our model of care, incur labor costs and redesign patient care. One of the things this election is going to change that I think you’re going to see is value-based purchasing will be expanded. Bundling is already coming about with the models that are in place.

Q: How have you been working differently with vendors, and how do you expect that to change now?MO: We’ve actually had pretty good luck in working with our vendors, getting the best price we can out of them. I think they are starting to be a little bit more sensitive and willing to work with us on a one-on-one basis. I even think that some of our GPO agreements are probably going to go by the wayside, because as an individual hospital I can go out and get better pricing on a lot of different items than I can under my group purchasing agreement.

Q: Historically, radiology is generally a profitable department in hospitals. How’s the outcome of the election going to impact the profitability of radiology departments?GB: I haven’t really seen any changes in the reimbursement formulas from radiology other than how it’s affected through the other programs. I think that in all of the major purchases for imaging, I don’t see a significant amount of pressure at our place for going to the best, newest technology right now. In terms of imaging, I think the pressure of getting the bright-est or the best or the newest technology, there’s going to be a softening of that demand for a while just because doctors don’t want to lose local autonomy.

Q: What can manufacturers do to help address these issues? The affordability of technology?AW: We’ve been meeting with our vendors and looking at each piece of reimbursement. Can we work together to say if reimbursements are reduced, can we all accept what the lower percentage is? We’ve also been working with them on better response times, so we can keep inventory levels a little bit lower. Also, getting equipment fixed as soon as possible, because sometimes we’ve had delays which I think under the new system are no longer going to be acceptable.

We’ve been looking at really those three points and our vendors seem very responsive. They certainly read everything that we do, and they realize the position we’re in and the chang-ing healthcare landscape.

Full interview: http://www.themarketechgroup.com/doc/minutes/tmtg-min32-Roundtable.pdfListen to the interview here: http://video.tmtg.us/webinars/w2/index.php?l=guest&p=tmtg=123