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Price Erosion Hits Medtech

Medical device developers have long struggled to keep production costs low. But margins on many medical products have remained high historically. According to CNNMoney, medical products and equipment sector is the fourth most profitable industry in 2009; only makers of networking equipment, Internet services, and pharmaceuticals were more profitable.

That may be changing, however. AdvaMed recently acknowledged that the prices paid in the United States for devices ranging from cardiac rhythm management units to hip implants, have dropped as much as 34% since 2007. Pacemaker prices fell 26% from 2007 to 2011, when adjusted for inflation; the prices of implantable cardioverter defibrillators fell by a similar margin. Not surprisingly, Boston Scientific and St. Jude who had derived a significant portion of their revenue from ICDs and pacemakers have suffered.

Indeed, the cardiovascular sector has fared especially poorly. Drug-eluting stents have fared worse than cardiac rhythm management devices--with their inflation-adjusted prices falling more than one-third in four years. Still, the pricing issue doesn't only pertain to that niche. Adjusted for inflation, the prices of seven of the most common types of medical devices dropped from 2007 to 2011.

The orthopedic field has also been hit hard. The cost of artificial hips and knees replacements fell by roughly one-fifth from 2007 and 2011.

Part of the reason for the downward trend is the growing influence of hospitals in making purchasing decisions and to reduce cost. In 2012, Modern Healthcare reported that hospitals' profit margins were generally higher than they have been in decades.

In remarks shared with the press, AdvaMed CEO Stephen Ubl stated that lower prices indicate that the medical device industry isn't behind an increase in healthcare costs in the United States. Armed with this data, Ubl believes that his trade group will be in a good position to repeal the 2.3% medical device tax, a part of the Affordable Care Act. According to Ubl, the excise tax and other ACA-related payment cuts have hampered efforts by industry players to develop innovative products and grow jobs.

As hospitals negotiate lower prices for medical devices, lower-priced medical device sales continue to grow, according to Ubl. In addition, Ubl alleges that medical device prices only increased at a rate that is half that of U.S. inflation.

Significant inflation-adjusted price reductions may impact a variety of medical device companies, including Stryker, Zimmer, Johnson & Johnson, Medtronic, and Abbott Laboratories, as well as Boston Scientific and St. Jude, which were mentioned earlier.

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