The Patient Protection and Affordable Care Act (ACA) represents the broadest change to the U.S. healthcare system since the creation of Medicare and Medicaid in 1965. The act is being phased in over eight years, allowing medical technology leaders to prepare themselves and shape the implementation of law. Ducker Worldwide predicts that the dramatic increase in patient access to healthcare mandated by ACA (more than 32 million people are expected to gain health insurance coverage) will overwhelm the healthcare system by 2015. The period from 2010 to 2015 is a window of opportunity for the medical technology industry, during which companies stand to benefit from the funding of new programs before the massive influx of new beneficiaries. In this period, innovators in the healthcare industry will be able to raise prices in excess of the new taxes imposed by the ACA. Medical technology firms must act quickly and aggressively to build a reserve of capital and reposition themselves to take advantage of this period of fast growth and profit before 2015. Otherwise they risk being absorbed or failing outright by 2020. 

The medical technology industry produces a diverse range of products, from disposables to complex surgical implants, and comprises more than 1700 competitors (health information technology is considered separately). It is highly fragmented, with only four pure play companies in the Fortune 500. Approximately 75% of the industry being venture capital backed. Ducker predicts that from 2011 to 2015, the industry will continue to receive 6% of the national health expenditures, which are predicated to outgrow other U.S. industries by more than 25%.

Overall the ACA supports continued high overall growth in this industry, but there will be winners and losers. 

The Winners. The ACA will increase industry consolidation and favor larger, innovative companies with high installation bases by 2015. Winners will enjoy increased pricing and volume opportunities, especially at the point-of-care (e.g., the physician office). Those companies that focus on personal diagnostic monitoring, health and medication maintenance, quality control and effective high-end therapeutic devices, and capital equipment will benefit.

The Losers. Reform will hurt smaller companies (less than $150 million in sales) in low-end, commodity segments with disproportionate Medicaid exposure and undifferentiated levels of outcome efficiency. Losers will gain in volume and service opportunities but will be put under increasing price and profitability pressures by the new law.

Although more than 10% of the U.S. population (about 32 million people) will be insured by 2014, ACA will not increase the overall market for medical devices and diagnostics by 10%. This is because many of the uninsured already have access to devices and diagnostic procedures either by paying for them out of pocket or mandated by Emergency Medical Treatment and Active Labor Act (EMTALA). Ducker predicts the newly insured will increase overall primary demand for the industry’s products by 3% after 2014.

Importantly, the newly insured will demand medical products and services that are more expensive than they can now afford. This will support significant price increases. Pharmaceutical companies and providers will promote awareness and compliance to drive demand to expensive, effective therapies that are unaffordable without insurance. This will drive new medical technology sales. Ducker predicts that diagnostic and device companies, especially those supporting high-end procedures and therapies, will benefit disproportionately from the newly insured.
 

Scale and Pricing Opportunity

Ducker projects that in many areas, the sudden addition of 32 million projected newly insured will overwhelm the U.S. healthcare delivery system by 2015. Companies that specialize technologies designed to accelerate physicians’ workflow, simplify medical procedures, and increase office throughput will be well positioned to succeed.

Of the newly insured, 16 million will be covered under Medicaid. Competing successfully in the Medicaid market means being a low-cost provider. Future winners are investing now to achieve scale economies and improve operational efficiencies. They are also testing differentiated tiered pricing and contracting with critical installation bases to prepare for the opportunity.

To accommodate the other 16 million newly insured customers, prudent medical technology companies are positioning themselves to support higher prices and benefit from expanded specialty target segments. They are implementing outcome-based differentiation and developing appropriate branding and acquisition strategies.

The tight capital markets are lowering valuations for smaller companies. From now until 2013, conditions are ideal to implement acquisition strategies that improve coverage of scale, market, and technology. Ducker predicts a significant increase in mergers and acquisitions in the industry until 2015.

The ACA is designed to focus the healthcare system on quality, effectiveness, prevention, and chronic disease management. As such, it presents device makers with significant opportunities.
 

Quality Opportunity

In 2012 and 2013, Medicare will introduce new payment models, including the following:

• A center for Medicare and Medicaid innovation. This was established within CMS in 2010 to test new models of care.
• The new accountable care organization (ACO) programs, which begin in 2012.
• A national pilot of bundled payments for episodes of care, which start in 2013.
• Value purchasing for hospitals beginning in 2013. The program begins for physicians in 2015.

Embedded in each of these payment models are quality standards. Today, quality standards are met for only about half of patients treated. Of those substandard cases, 80% are caused by a failure to provide recommended treatments as opposed to inappropriate or unnecessary care.¹ Enforcement of these quality standards can signify market growth for medical technology companies that are positioned to help providers attain and maintain quality goals. This will be especially true of providers with pay-for-performance contracts that reflect specific quality standards, such as infection management and hospital readmission rates.
 

Effectiveness Opportunity

Comparative effectiveness research is established by the ACA through a new institute—the Patient Centered Outcomes Research Institute (PCORI). The industry will benefit directly from demonstrating and communicating the effectiveness of its products. It is also in industry’s best interest to enable others, such as pharmaceutical companies and healthcare providers to measure care effectiveness. The industry winners are already positioning themselves to respond to these opportunities through comparative effectiveness with technology platforms, service design, partnering, acquisition, branding, communication, and contracting and pricing strategies.

Measuring and monitoring the comparative effectiveness of other healthcare players will also accelerate growth. Pharmaceutical firms, healthcare providers, and payers will demand tests, technologies, devices, and equipment that support their comparative effectiveness research.

Rarely has there been a better window for the medical technology industry to partner with the other healthcare industry segments to improve revenues and profitability.
 

Prevention Opportunity

The ACA will direct $20 billion to disease prevention, health maintenance, and wellness, expanding the market for in-vitro diagnostic tests and imaging studies for screening. Equipment for health maintenance and wellness services will be insured for larger populations, enlarging the market for well-positioned companies.

Ducker predicts the ACA dual insurance mandate, combined with the mandated expansion of meaningful use of electronic medical records (EMR), will dramatically increase the demand for genetic testing and other screening technologies, especially in areas where medical technologies are available to maintain wellness or to treat or prevent disease. The ACA will strengthen the ties between medical equipment and medical information technology and increase focus on prevention and chronic disease. Industry leaders are already responding to such changes.
 

Chronic Disease Management Opportunity

The ACA reduces costs by shifting chronic disease care to lower cost environments. It is crucial to become a preferred partner of the supply and support channels and networks that are capable of providing hospital-level oversight at patients’ homes. Remote monitoring products, services for the home, and mobile technologies enabled by existing phone and computing infrastructure will expand more rapidly, be more profitable, and be taxed less under the ACA. Industry winners are assembling product and service lines capable of offering a consistent suite of location-appropriate products and services. These services should support the bundled payment, pay-for-performance, value payments, and new business models that will be launched by the ACA. 

Acquisition Opportunity 

The medical technology industry will consolidate under the ACA. Small companies in generic, low-cost segments overly exposed to Medicaid patients are at risk. The ACA’s new payment models reduce individual physician power and consolidate provider power. Professional purchasing committees and physician employees will have a crucial role in hospital cost-reduction programs. There will be an increased focus on long-term contracts, supplier rationalization, and product and service standardization. To win, small players in the fragmented medical technology industry must quickly establish a critical mass and installed base in target market segments, band together to bid procedures across a spectrum of care locations, or possess protected intellectual property with demonstrated improved outcomes. Without such strategies, small firms will be acquired or fail.  

The other factor that represents a disproportionate disadvantage to small players is the new 2.3% excise tax on domestic sales of all medical devices. Small players have less to deduct because on average, they do not become profitable until annual sales exceed $100 million. Second, small players sell far less on the international market than do large companies. Third, the ACA exempts devices sold predominantly at retail for use by individuals, giving a competitive advantage to larger companies, which are capable of exploiting large, fragmented, and consumer-targeted markets. Fourth, the excise tax will take effect in 2013, although the law will not expand coverage until 2014. Large companies with deep pockets are better able to bridge this chasm than small players. Many companies are monitoring acquisition opportunities to offer proprietary products to increasingly integrated providers and informed patients under the ACA.  

The ACA limits growth of Medicare payments. Cuts to providers projected by the congressional budget office can get passed to medical technology manufacturers in the form of pricing pressure and deferred purchases of more expensive capital equipment. Recent actions of congress, not to mention pressure from industry and patient interest groups do not support such formula-driven payment updates. Furthermore, hospitals will gain much more from expanded coverage than they will lose from Medicare payment cuts. 

The greatest pressures arising from Medicare cuts will occur to the hospital suppliers in 2013 and 2014. Specific segments also are targeted for additional cuts. An estimated $1.4 billion will be cut from the durable medical equipment budget by expanding the metropolitan statistical areas subject to competitive bidding in 2011 and nationwide in 2016. Clinical labs, the main customers of diagnostic manufacturers, will face an additional reduction of 1.75% per year from 2011 to 2015 in the annual update factor for their fees. Additionally, the physician fee schedule for imaging services will be changed to reduce payments by $230 million annually through 2019.
 

Shaping Opportunity 

The industry should lobby to influence the implementation of the ACA. A good example of this is the effort to repeal the excise tax, which is already being pursued through different sources. Companies should align with NGOs and the Pharmaceutical Research and Manufacturers of America to reduce the negative impact of the independent payment advisory board, shape FDA policy, and advance global IP protection.  

At an industry level, medtech companies must collectively focus on two areas of the ACA: push for the adoption of innovative best practices through PCORI, and improving public confidence in the relationship between manufacturers, teaching hospitals, and physicians should strengthen industry ethics standards.  

Conclusion

The medical technology industry generally will do well under the ACA, continuing growth through 2015 at historic rates. Returns on investments in the industry have been 30% and Ducker projects this to continue. There will be losers and winners under the ACA. Large companies focused on home and individual medical technologies with protected innovation and demonstrated outcomes have additional competitive advantages under the ACA.  

The ACA offers significant growth opportunities in achieving scale economies and positioning to compete for the newly insured market segments. Even larger opportunities arise from the ACA’s impact on the entire system in areas of quality control, comparative effectiveness, prevention, and chronic disease management. Planning now will allow medical technology companies to overcome the excise tax and cuts to Medicare expansion and thrive by 2015.  

The worst strategy is to do nothing but hope that the ACA will be somehow rendered ineffective. Medical technology companies must experiment with business models, consolidate market and technology strengths, and be positioned to capture the value from the rapid influx of newly insured segments in 2014. Firms that do not take action will find themselves competing in a new environment against competitors who are better prepared.   

Ducker predicts that the most difficult period of transition will be from 2013, when cost-control measures are implemented, through 2014, when the influx of insured patients will arrive. Once the deductible hurdle has been cleared, demand for the medical technology industry’s products and services will be at unprecedented levels. The biggest winners in such an environment of abundance will be those that begin preparing strategically now.  

References

1. McGlynn et al., “The Quality of Health Care Delivered to Adults in the United States,” New England Journal of Medicine 348, no. 26 (2003): 2635–2645.

Frederick W.K. Brown is healthcare practice managing director for Ducker Worldwide (Troy, MI).