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Must-know: Insurance exchanges will affect medical device stocks

Big change to come in the healthcare industry

Ready or not, state-run insurance exchanges will be ready for open enrollment starting October 1. The introduction of these public exchanges for individuals and small group employers highlights a significant change in the healthcare industry. Making consumer access to healthcare easier, more than 30 million people are expected to flood the health insurance market and get coverage via exchanges.

The expansion of health insurance coverage following the insurance exchanges presents many risks and opportunities for the medical device industry.

Health Exchange MembershipEnlarge Graph

Opportunities for the medical device industry

Primary opportunities for growth by large device manufacturers like Johnson & Johnson, GE, and Siemens lie in the inherent increase in demand and revenues following a population that can now afford the devices. The substantial expansion of coverage starting with open enrollment via exchanges stands to increase the number of elective medical device procedures performed on people who were previously uninsured. Bloomberg Government finds that the demand and revenue from millions of new customers can significantly offset the impact of the excise tax on the industry. Proponents of the 2.3 excise tax implemented by the ACA (Affordable Care Act) earlier this year also support this statement by pointing out the improved benefits (including more medical device reimbursement) that these exchange plans offer, which will generate significant increases in cash flow.

Increases in the amount of patients with capable payors also suggest reimbursement risk will be mitigated in the industry. This bodes well for companies like Medtronics and Baxter International, which list the risk as a primary factor of business. Alongside growth in private insurees, individuals in certain states who still can’t afford insurance off the exchanges and who make less than 133% of the poverty limit will be included under Medicaid expansion, and their respective states will pick up the reimbursement bills.

Many risks for medical device manufacturers

Despite the opportunities, the effect of increased coverage via exchanges also presents a myriad of risks for manufacturers. A primary purpose of public health insurance exchanges is to increase competition between insurers. Increased competition suggests lower possible premiums and therefore lower reimbursement rates for device makers. The CMS (Centers for Medicare and Medicaid Services) have already made statements hinting at more stringent reimbursement policies following the influx of coverage with Medicaid expansion. Unprecedented increases in device utilization could shock payors and significantly reduce payouts to device manufacturers—negatively impacting cash flows and valuation.

Unclear outlook

Outlook for the industry remains clouded, as open enrollment begins October 1 and coverage is mandated to start January 1, 2014.