White House Vows Not to Stifle Medical Device Industry : Health: But fear persists about what health-care reform will mean for one of the Southland’s rare growth industries.
The task force forging the Clinton Administration’s omnibus health-care reform package left little doubt in recent months about where it stood on such industries as drug manufacturing, health insurance and managed care: Costs must come down.
But the Administration has been largely silent about what reform would mean to medical device manufacturers--companies that design and make everything from syringes to three-dimensional X-ray machines. These companies say they fear the uncertainty of reform and its ultimate effect on new product development, marketing strategies and corporate restructuring.
In the past 10 days, the silence was broken.
In an address to a meeting of such manufacturers, Ira Magaziner, senior policy adviser for health-care reform, said no regulatory policy would be permitted to stifle the burgeoning, $30-billion-a-year medical device industry.
“The uncertainties about health-care reform was contributing toward a jittery venture capital market and general unease in the industry,” Magaziner said in a Times interview last week. “We have been concerned about that. But we think that what we are proposing should put people’s minds at ease.”
But corporate executives, stock analysts, venture capitalists and industry observers remain wary about what health-care reform will mean for one of Southern California’s few growth industries.
At best, reform will force further cost-cutting by medical device makers, leading them to be more selective in choosing which new products to develop.
At worst, experts warn, reform could shrink overall industry growth, force thousands of layoffs of highly skilled workers and stunt innovation.
“We’re not going to see quantum leaps in technology development because it is going to be too risky,” said Daniel Korpolinski, president of the Orange County Biomedical Industry Council. He is also chief executive officer of Irvine-based CoCensys Inc., which is developing drugs to treat disorders of the central nervous system.
Korpolinski’s council represents about 300 biotechnology and medical device companies in the county and it opposes health-care reform, saying that government should not interfere with the free market and does not have enough expertise to mandate universal coverage fairly.
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Clinton’s health-care reform proposal calls for creating hundreds of regional “health alliances” that would shop for the best insurance plans on the basis of price and quality. Consumers would then choose from among those plans.
The proposal would require all businesses to pay at least 80% of every worker’s insurance premiums, with workers picking up the rest. As a result, many employees, especially those in large corporations, would actually pay more for their care than they already do, forcing them to become more responsible for monitoring health-care costs.
No company would have to pay more than 7.9% of its payroll to provide health coverage, and small businesses with 75 or fewer low-wage earners would receive government subsidies on a sliding scale while having their premiums capped as low as 3.5% of payroll.
The Health Care Technology Institute, a nonprofit Washington think tank for the medical industry, has reviewed the Clinton proposal and recently issued a report about how it would impact the medical device industry.
That report, titled “The Potential Effects of Health System Reform on Medical Technology,” was inconclusive in many ways, but it insisted there would be major changes--both positive and negative.
“Such changes could be significant, altering current methods of payment and coverage, as well as use, purchasing, distribution, and ultimately, innovation” of medical devices, the report says. “Such changes could result in opportunities for some products, and challenges for others.”
Robin J. Strongin, the author of the report, predicts that devices which reduce the length of hospital stays, provide less costly procedures, or that allow for non-hospital care--at patients’ homes or at outpatient surgery centers--would fare better than others.
“Those (benefits) are happening now” with health maintenance organizations and other forms of managed care, Strongin said. “Reform will move it along at a much faster rate.”
But large, expensive machines, such as magnetic resonance imaging machines that take pictures of the inside of the body, may lose substantial sales because their technologies “provide significant patient benefits, but at a cost that may be difficult to absorb in a constrained system.” Strongin added that new product development would eventually suffer as profit margins shrink.
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The Health Industry Manufacturers Assn., an industry lobbying group, endorses most of Clinton’s plan for managed competition. And Steven Speil of the association said he was heartened by Magaziner’s message that the Administration will not interfere in equipment pricing and that it would let the marketplace dictate which devices would survive in a more cost-conscious health-care system. “His thinking is similar to ours,” Speil said.
Nevertheless, Speil cautioned that any hands-on approach by government regarding devices would likely be negative.
“The markets work a lot better than bureaucrats,” Speil said. “We don’t want bureaucrats getting in the way and making any decisions that should be made by practitioners.”
Unlike doctors and other practitioners facing reform, most device manufacturers sell overseas--often before they sell their products in the United States, and are therefore familiar with a variety of universal and single-payer health-care systems.
Louis T. Rosso, chief executive of laboratory equipment maker Beckman Instruments Inc. in Fullerton, said his company has been searching for clues about how reform will affect his company by studying the health-care systems of Italy and Germany.
As a result, Beckman, like other medical device firms, has been forced to scale back some of its operations in anticipation of cost constraints.
“We have looked at the changing market, all of our markets,” Rosso said. “And we have redirected our strategy to long-term opportunities.”
Jeffery Fenton, a spokesman for Illinois-based medical equipment giant Baxter International Inc., whose Irvine unit makes surgical devices for heart and kidney patients, said that the $8.5-billion company has been affected by the industry uncertainty and has announced a corporate restructuring in recent months.
“There’s been a dramatic slowdown in sales,” said Fenton, who could not specify how much was linked to its customers taking a wait-and-see approach to federal reform. “The customer is changing and we are trying to be flexible so we can make decisions.”
Meantime, most company stocks have fallen--at least partly due to the ongoing uncertainty--since late last year. Some of those losses have been dramatic.
Jim McCamant, publisher of the Medical Technology Stock Letter newsletter in Berkeley, which tracks industry stock values, said the jitters that have hit some companies hard on Wall Street will continue, at least until the reform package is completed.
“The whole industry has been hurt because of the uncertainty,” McCamant said. “Uncertainty is something that Wall Street and investors don’t like.”
For example, Baxter saw its stock plummet on the New York Stock Exchange from a 52-week high of $35.125 a share on Dec. 9, 1992, to a low of $19.875 a share by late September. It has rebounded slightly, hovering in the low $20 range.
In Orange County, McGaw Inc. of Irvine, which supplies intravenous pumps to hospitals, doctors’ offices and home health companies, was trading as high as $11.75 a share on the Nasdaq market last year, but sank to $7 a share on April 20. It has rebounded to about $10 a share.
And in San Diego, Advanced Medical Inc., a maker of intravenous pumps, was devastated, falling from $11 a share 12 months ago, to less than $1 a share on the Nasdaq market now.
Other companies across the nation have suffered similarly.
Newport Beach venture capitalist Russell Diehl predicted that losses will continue if health-care reform is instituted. He heavily criticized the Administration for attempting to reform the health-care system by adding new layers of bureaucracy. He also said he did not believe the federal government could resist regulating the prices of medical devices.
“They are spouting doublespeak,” Diehl said. “From a business point of view, this has been atrocious.”
But White House health policy chief Magaziner said the Administration is committed to letting the industry and investors know that it will take a hands-off approach.
He said that there will be no price controls, and argued further that setting limits on how fast health premiums can rise is not the same thing as establishing a so-called global budget, a concept opposed by most manufacturers.
“We believe the American medical device industry is an important, competitive industry for this country,” Magaziner said. “We are concerned that message get out.”
Managed care giant Kaiser Permanente joined with the BlueCross BlueShield Assn. to examine the future of medical technology, including what types of medical devices would be developed and how to balance cost against quality.
Kaiser Permanente’s Dr. David M. Eddy, who served on the Clinton health task force, said that while some companies might be hurt, the proposed reforms would force the industry into a more efficient free-market environment.
Today’s health system masks the true costs of care, with patients and doctors involved in hundreds of health plans having little responsibility to restrain rising costs, which are picked up by employers and their insurers, Eddy said.
Under reform, he said, physicians and health providers would have to survive with limited increases in annual premiums, providing new incentives to weed out inefficiencies, including when buying medical devices.
“Health plans will have to make difficult decisions about just which technologies or devices to use,” Eddy said from his Jackson Hole, Wyo., home. “In the future we are going to have to be very careful to ensure that when we spend the public’s money, we spend it on those activities or those technologies that provide the most benefit for the buck.”
