Medical-Device Makers' Killer: Health-Care Inflation

Watch your back if you invest in medical-device makers. It seems there are plenty of people trying to prove that the advantages of medical devices don't justify their costs.

An article in this month's Archives of Internal Medicine concluded that patients with a minor increase in their QRS duration -- the spike during every heartbeat on an electrocardiogram -- don't benefit from cardiac resynchronization therapy, or CRT, devices. The data, pooled data from five clinical trials, confirmed a benefit for patients with a QRS duration above 150 milliseconds, but not for patients with a QRS duration between 120 and 150 milliseconds.

The $25,000 devices sold by Boston Scientific (NYSE: BSX  ) , Medtronic (NYSE: MDT  ) and St. Jude Medical (NYSE: STJ  ) are currently recommended for patients with a QRS duration above 120 milliseconds because that's the typical cutoff that companies have used for inclusion in studies.

A meta-analysis -- looking at pooled data retrospectively -- isn't as rigorous as a prospective study, but that's not really the point. The fact that researchers are doing these studies highlights the target that medical-device makers have painted on their backs.

This is nothing new
A 2007 prospective study known as Courage concluded that drug-eluting stents combined with a cocktail of generic drugs didn't reduce the rate of deaths and heart attacks over starting with drugs and doing the procedure only if chest pain persisted.

Sales of drug-eluting stents from Boston Scientific and Johnson & Johnson (NYSE: JNJ  ) fell for a while, but sales came back. In fact, two companies -- Medtronic and Abbott Labs (NYSE: ABT  ) -- subsequently gained Food and Drug Administration approval for their drug-eluting stents. Johnson & Johnson recently announced that it's getting out of the business, but the rest of the companies are still going strong.

Why would doctors continue to perform the procedure when cheaper drugs could solve the problem? The simple, cynical answer is that doctors get paid to do something. Sitting and waiting for chest pains to get worse doesn't pay nearly as well.

Doctors will tell you that the procedure helps with the chest pain quicker. And they're right. But if most people were footing the bill directly, they'd try a few months of $10 copays before moving onto a $15,000 procedure. 

That's going to change
Patients do foot the bill for medical procedures indirectly though their premiums. As premiums reach levels that are intolerable and/or unaffordable, they'll start really demanding lower costs rather than grinning and bearing it like they do now.

Health insurers such as UnitedHealth Group (NYSE: UNH  ) and Aetna (NYSE: AET  ) have limited abilities to lower costs directly. They negotiate with drug and medical-device companies, but there's a limit to the discounts they can get.

The real financial savings come from not doing the procedure in the first place. Right now, patients want access to every available option, no matter what the cost. And there's no incentive for insurers to impose restrictions, since they just tack their profit on to the top of the medical cost. If patients are willing to pay for the lobster buffet, insurers are happy to provide.

But once the prices become too high, patients will seek out the value menu. They'll tolerate restrictions that control costs because they can't afford premiums on policies that don't have them.

We could even see Medicare restricting reimbursement of some medical devices, although it's trickier with public programs where participants don't pay for the full cost of the premiums. The cries of "death panels" will surely reappear.

The changes are likely to come slow and might give medical-device makers room to change. Who knows -- it could be already happening. Maybe Johnson & Johnson's move out of drug-eluting stents wasn't because its technology had fallen behind but because it's worried about reimbursement.

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Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson, UnitedHealth Group, Medtronic, and Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group, Abbott Laboratories, and Johnson & Johnson and creating diagonal call positions in Johnson & Johnson and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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