Medical device forecast: Cloudy with a 70 percent chance of uncertainty

What's up with the medical device industry these days?

Earlier this month, St. Jude Medical Inc. sent out a curious warning about its third quarter earnings. Sales and profits will drop because "macroeconomic factors coupled with the continued pressures surrounding health care reform [that] resulted in changes in purchasing behavior among some of our hospital customers," CEO Dan Starks said.

To me, the statement marked the first time the dreaded "R" word had a demonstrable financial consequence on a major medical device maker. Pundits and analysts had been speculating on this for months and now, voila!, the chicken has apparently come home to roost.

But then Boston Scientific Corp. releases its earning last week and in another unusual move, directly contradicts its competitor.

"So far this year, CRM market growth has not been as strong as expected, but our CRM business has continued to grow, and we have not seen the slowdown in hospital stocking described by St. Jude," said Ray Elliott, President and Chief Executive Officer of Boston Scientific.

Translation: "I don't know what's your problem Dan but we're still kicking it over here at BSX."

So who to believe? Piper Jaffray analyst Tom Gunderson says we won't really know until market leader Medtronic Inc. releases its earnings in late November.

Medical device firms, the lifeblood of Minnesota's high tech economy, are entering perhaps the most perilous period in its history since Earl Baaken created the pacemaker in the 1960s.

On one front, there's the broader economy. The recession has taken a big chunk out of hospital's budgets, forcing them to them to cancel or delay big capital expenditures, like the new cancer ward or the latest multi million CT scanner. Over the years, hospitals had relied on bonds and good old fashioned borrowing to finance their ambitions. But like most companies, the hospitals found themselves shut out of the credit markets when the economy collapsed last fall, experts say.

To make matters worse, cash strapped and increasingly frequent jobless patients have cut their health spending, preferring to delay treatments until the economy improves, Gunderson said.

Health care, however, is not like a consumable good or service. You can probably not eat out or buy that Nintendo Wii without much long term consequence. Yet, if your arteries are clogged...well, your arteries are clogged.

"It's not like people automatically stay healthy during a recession," he said.

Which brings me to the second front facing the medical device industry: health care reform. Something's going to pass and medical device firms should brace themselves for a hair cut.

I'm not simply referring to the proposed $40 billion tax on medical device firms. As fellow reporter Janet Moore and myself wrote in an earlier story, private insurers and Medicare are no longer willing to pay for whatever device comes their way.

Thomson Reuters recently released a report that concludes waste, fraud, and inefficiency cost the U.S. health care system $700 billion a year, a staggering figure that almost covers the entire cost of health care legislation in Congress.

What caught my eye was the report's cost estimate for "unwarranted use" of medical technology: $250 billion to $325 billion.

"Nearly all experts agree that a significant amount of direct provides no or only marginal value to either the diagnosis of a patient's condition or effective treatment of a diagnosed condition," the report says.

The report says insurance companies spend about $30 billion a year on these procedures. If even a third of them are unnecessary, the system could save about $10 billion a year.