Hospitals face rough ride under reform but device makers may fare worse

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The financial outlook for hospitals under healthcare reform initially appears rocky but may perk up with time. Medical devices makers, on the other hand, should brace for difficulties, according to a report published July 17 by Moody’s Investors Service.

“Medical device manufacturers will be the most vulnerable, while both for-profit and not-for-profit hospitals will be subject to risk during a transition period. Insurers stand to gain the most,” Moody’s analysts wrote.

The 2010 Affordable Care Act is driving the implementation of new reimbursement systems that reward cost-effective care. This trend could cause the number of hospital admissions and procedures to decline, leaving medical device makers out in the cold if their products are not used.

Certain devices are especially at risk. Among them are devices used in elective procedures, devices used in procedures believed to be overused—such as implantable cardioverter-defibrillators—products used in hospitals that have virtually become commodities and products not proven to be cost-saving or reimbursement-lowering to hospitals.

“Companies that will be the most successful are those that can demonstrate both innovation, safety and effectiveness to physicians as well as cost savings or better reimbursement results to hospitals,” the authors explained.

In contrast, insurers will look forward to a very different outlook.

“Health insurers have traditionally benefited from lower utilization trends and will be more immediate winners as use rates decline,” the analysts argued.

Hospitals fall somewhere in the middle of the risk-benefit spectrum.  The authors predicted they will start off financially vulnerable, but could catch up later.

For-profit and not-for-profit hospitals will continue functioning with the traditional, volume-heavy reimbursement system in place while the newer system that incentivizes quality over quantity gets implemented.

The transition will be rocky and profits will decline, but hospitals can bounce back by employing key strategies.

“These include employing physicians to align financial interests; adopting better information technology to assess costs; and starting with capitated contracts that cover a limited number of people, such as a large business or school district, in order to gain experience before signing larger contracts,” they explained.

Hospitals and insurers are trying out new reimbursement models. While they are all different, they all make reimbursement dependent on factors other than patient volume and often  do not reimburse for procedures believed to be duplicative or for follow-up care that could have been avoided with better care at the outset.

Pharmaceutical companies will not likely experience significant bottom-line changes, unlike the other healthcare sectors.

“This is because most pharmaceutical costs are typically reimbursed as a separate benefit for both commercially-insured and Medicare beneficiaries and will be continue to be paid on an as-used basis,” the analysts wrote.