<

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.

The Realist Discussions

  • D.Huisjen

    I read your article with interest. It is full of sloppy reporting. You report “projections” as “facts”. If you take the time to check out the facts, you will find that Stryker did not lay off 1000 people at the end of 2012, as you have reported. Stryker added a huge number of jobs in 2012! Some offices were closed for consolidation of acquisitions, but jobs were not cut. Your politics are getting in the way of honest reporting. And for the most part device stocks are at an all-time high. How has the proposed tax hurt device makers then?

    • Amritpal Khalsa

      Hello Mr. Huisjen. I appreciate the interest you took in my article. In response to your comment, although Stryker did increase their workforce they did lay off a thousand people and attribute it DIRECTLY to the device excise tax: http://www.examiner.com/article/stryker-lays-1-000-people-off-blames-obamacare-s-medical-device-tax
      Secondly, if you took the time to read the paragraph explaining how the tax has hurt device stocks, you would read that the tax has caused device stocks to perform lower RELATIVE to their healthcare counterparts (biotech, pharma, etc) so far this year. This occured due in part to lowered forecast for device stocks as investors feared the impact of the excise tax on industry earnings.