Weekend InvestorNext clash for health-care stocks already in sight
6/15/12 4:30 PM ET (MarketWatch)
ReutersDoctors, hospitals, insurers and employers finally are focusing on lower health-care costs, an effort that targets medical suppliers. Protesters at the Supreme Court in Washington last March.
LOS ANGELES (MarketWatch) -- In the battles to come for health-care companies and their stocks, the future is about so much more than the Supreme Court.
No matter how the high court rules in coming days on the industry's landmark legal overhaul, analysts say, the nation already has locked itself into a do-or-die mission to rein in the skyrocketing cost of care.
And the way those efforts are unfolding, the sector's medical-gear suppliers -- providers of everything from implantable heart defibrillators to tongue depressors -- could end up paying the price for decades of out-of-control inflation.
"The ground is shifting," said Debbie Wang, medical technology analyst for Morningstar.
Doctors, hospitals, insurers, and even patients, have all taken up the cause at a time when health-care inflation outstrips overall cost-of-living increases by 3 to 1.
The consumer is emerging as a force now that insurers and employers are forcing them to shoulder more of the costs.
For many years, industry analysts say, health-care inflation ran amok partly because neither consumers nor doctors had much incentive to consider costs. After all, third-party insurers were footing the bill, leaving those who administered or used health care with little skin in the game.
Now, however, doctors and patients are minding the costs with greater scrutiny. That means medical-device makers and suppliers of health-care equipment -- which feasted for a decade and nearly doubled their margins -- will end up being the target of the rush to rein in costs.
That trend seems unlikely to alter course, regardless of how justices rule on the 2010 overhaul to the health-care system, analysts say.
It is considered remotely possible that the high court will throw out the entire 2,000-plus-page law. But the biggest steps they are likely to take is to repeal the mandate that all individuals obtain insurance while also striking down the requirement that carriers cover everyone, regardless of past medical histories, analysts say.
Expected to remain intact in the law is the 2.3% excise tax on makers of medical devices and suppliers of equipment. It was included as many companies in the sector saw their profits jump sixfold in the decade before the health law was passed.
"I think that's part of what made them a nice, fat target," Wang said. "They're doing their best to adapt, but I don't think that necessarily translates into maintenance of those margins."
The list of companies in this realm covers a broad array of manufacturers of products used every day in all U.S. hospitals and private medical practices. It includes giant conglomerates such as
Also in this mix are big players like Becton, Dickinson & Co. (BDX) ,
While diversified leaders like Johnson & Johnson already are better equipped to absorb any shock, other companies increasingly will look for efficiencies to protect the lucrative empires they have built over the years.
Some are shifting production facilities overseas. Others are simply cutting back on personnel in an effort to preserve meaty profit margins.
"Most of the big guys already knew this day would be coming," Wang said. "I think they saw the writing on the wall. I think they knew they were going to have to pay to play."
But don't blame the device makers, analysts say. They were simply making the most of a permissive market system that was willing to accept soaring prices.
For much of the last decade -- and for years before that -- patients largely looked the other way as insurers footed the bill.
Doctors did the same thing when ordering supplies or lobbying hospitals for new equipment, again figuring that insurers ultimately would make it worthwhile.
That put pricing power squarely in the hands of medical-equipment suppliers.
"They were price givers rather than price takers," said Les Funtleyder, portfolio manager at Miller Tabak & Co. Funtleyder has holdings in a number of health-care firms.
Today, however, doctors are cutting their costs and forsaking private practices as their salaries have dropped.
Many physicians are joining larger clinics or simply working out of hospitals. While they cared little about pricing before, doctors and hospitals both are shopping around for the best prices or the most cost-effective means to administer care.
"The device companies did things for themselves, either by raising prices or introducing devices at very steep prices," said Glenn Novarro, analyst at RBC Capital Markets. "Hospitals just finally said, 'Enough.'"
Funtleyder says the health-care overhaul bill did little to put a clamp on an out-of-control cost structure, though it did try to address it somewhat.
Oversight groups designed to keep a lid on costs are supposed to start forming in 2014, when major provisions of the bill take effect. Those are likely to remain intact when the high court hands down its decision.
"There will be some modes of controlling costs, although in my mind these aren't enough," Funtleyder said.
Morningstar's Wang added, however, that not all is lost for medical suppliers and device makers, provided they keep the prime pumped.
She said Edwards Lifesciences, for example, is in position to thrive following this week's decision from a U.S. Food and Drug Administration panel to recommend that uses for the company's Sapien heart valve be expanded to treat more high-risk patients.
"These companies have a little bit of wiggle room," Wang said. "There's enough in the pipeline that's innovative and impactful enough."
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