The healthcare reform bill recently signed by President Obama is an extremely complex piece of legislation and no one is certain what the final effects will be.

While many articles have been written on the effects of healthcare reform for individuals, the effects of the reform for the medical device industry have not been addressed in detail.

The effects of healthcare reform are split into two categories:

  • Short term effects (Starting between 2010 and 2012)
  • Long term effects (Starting after January 2013)

The short term effects of healthcare reform on the medical device will be very modest. The legislation will make it more difficult for insurance companies to drop clients and as a result, more people will be able to afford expensive treatments. However, the number of people affected by this change will be relatively small. Rescission (the termination of insurance coverage) affects less than 1% of the insured population per year and is concentrated among patients that require expensive chronic treatment. In addition, healthcare reform will allow young adults up to 26 years of age to continue to be covered by their parents’ insurance, as long as they are not employed fulltime. This change is expected to come into effect by September 2010, although it will likely not be fully implemented until January 2011. While two to four million young people will gain health insurance coverage as a result of this change, this will have a relatively minor impact on the medical device market, as this age group is relatively healthy and less likely to require medical procedures.

In January 2013, a 2.3% excise tax on medical device sales is scheduled to go into effect. This tax represents a substantial threat to the profits of medical device companies. However, there is a major lobbying effort underway by the industry to repeal this tax. It is likely to be either reduced or eliminated before January 2013. If this tax is not repealed, it is likely that medical device manufactures will pass on the bulk of the tax onto the healthcare system by raising prices. Smaller companies that compete on price will be affected far more than larger companies that have significant pricing power and the ability to negotiate with group purchasing organizations (GPOs). A provision that was temporarily inserted into the medical device tax during the negotiations preceding the passage of healthcare reform, if revived, may exempt smaller device companies from having to pay this tax.

In January 2014, the key provisions of the healthcare reform bill will come into force. This will mandate healthcare insurance for all Americans and provide subsidies to those that cannot currently afford it. Between 28 and 40 million uninsured residents of the U.S. will gain health insurance. A large proportion of the newly insured will be covered through a massive expansion of Medicaid enrollees. Because Medicaid pays far less per procedure than Medicare, hospitals lose money almost every time they treat a Medicaid patient. Therefore, hospitals will continue to try to minimize the care they offer to these patients, limiting the demand for medical devices. Most Americans who currently do not have healthcare insurance, but have sufficiently high incomes to not qualify for Medicaid, will receive subsidies to purchase health insurance from private companies or government run ‘health insurance exchanges’. The insurance plans offered to this group will have substantial co-pays for many procedures limiting the demand for increased healthcare access. The existence of these co-pays will be a major deterrent to those with subsidized insurance and are the main reason why primary care physicians will not be completely overwhelmed by new patients.

As a result of the expansion of healthcare insurance coverage, the number of patients seen by primary care physicians and hospitals should increase, while the number of patients seen by ER departments should decrease slightly. However, the types of care delivered to those with Medicaid or low-end healthcare insurance will be more limited than that available to those with more generous workplace insurance benefits. This disparity will lead to substantial increases in demand for relatively low cost products, such as dressings, IV catheters and diagnostic products, but a much smaller increase in demand for expensive and/or elective devices, including implantable cardiac-defibrillators (ICD), hip implants and neurostimulation devices.

The major long-term effect of healthcare reform to the medical device industry is the intent to reduce approximately $500 million in Medicare and Medicaid spending over ten years by finding efficiencies as well as eliminating waste and fraud. Since it is unlikely that the desired savings will be created by eliminating waste, a reduction in Medicare reimbursement rates may be required. However, it is difficult to believe that in the current U.S. political climate there is enough political will to make any meaningful cuts to Medicare. While spending on some programs, such as Medicare Advantage, may be reduced, there is no sound reason to believe that the growth rate of total government healthcare spending will decline.

Perhaps the most promising aspects of the healthcare reform bill are the various pilot programs designed to assess the feasibility of more fundamental healthcare reforms, such as alternatives to “fee-for-service” billing. Any reforms to reimbursement could have a dramatic effect on the medical device industry. However, the size of the healthcare system suggests that any reforms arising from these pilot programs will take at least a decade to implement.

Overall, healthcare reform will boost demand for relatively inexpensive medical devices by dramatically increasing the number of people with access to non-emergency healthcare. But even this effect will be limited by the fact that the newly insured will have plans with high deductibles and co-pays that will discourage use of healthcare services.