Heart Device Makers Face New Challenge (AP)

By MARK JEWELL, AP Business Writer

BOSTON - Proposed cuts in government reimbursement for expensive but potentially lifesaving heart devices including defibrillators and stents have created a new financial challenge for the fast-growing industry.

The cuts, which device makers are opposing, could reduce by as much as a third the rate that Medicare pays hospitals for heart implants that aren't covered by private insurance.

The reductions were about twice as steep as many analysts had expected, which sent shares of Boston Scientific Corp. and rivals Medtronic Inc. and St. Jude Medical Inc. down 2 percent to 3 percent on Thursday. The day before, the Centers for Medicare and Medicaid Services proposed annual revisions to reimbursement rates for various hospital procedures covered under Medicare, the federal program for the elderly and disabled.

Industry analysts say the new adjustments go further than those in previous years to more closely align government reimbursement with the actual costs hospitals incur for surgeries, and to reduce coverage for surgeries carrying high profit margins.

Hospitals are expected to respond by trying to squeeze price concessions out of device makers. But industry analysts say the financial hit to the manufacturers will likely be modest and temporary.

"Reductions in reimbursement can cause momentary disruption in the revenue and income generation for some companies," John Putnam, a Stanford Group Co. analyst, said in a research note Monday. "But by and large, they have learned to offset these pressures."

Historically, device makers facing price-cutting pressure have managed to keep their bottom lines healthy by developing new models that cost more, Putnam said. They also find ways to remain profitable by cutting manufacturing and supply costs.

However, the reimbursement cuts for stents, defibrillators and pacemakers will further complicate price negotiations between hospitals and the makers of the increasingly expensive devices.

"If these cuts go through, hospitals are going to put enormous pressure on manufacturers to reduce costs," said Dr. William Maisel, a cardiologist at Boston's Beth Israel Deaconess Medical Center.

Industry officials plan to press for less severe cuts during a 60-day comment period set by the Centers for Medicare and Medicaid Services, which administers the federal programs. Maisel and industry analysts expect the industry to largely succeed.

However, Piper Jaffray analyst Thom Gunderson said hospitals will be more inclined to use older and less expensive devices for some surgeries than they might otherwise use. Gunderson expects that will shave around 1 percent of the profits of Minnesota-based defibrillator makers Medtronic and St. Jude next year.

Gunderson forecasts a slightly bigger hit for Natick-based Boston Scientific, which expects to conclude a $27 billion acquisition of Guidant Corp. late this week, following antitrust clearance from federal regulators. The deal will combine Boston Scientific's business in stents and other medical devices with the Indianapolis company's portfolio of defibrillators and pacemakers.

If the proposed cuts stand without modification, Medicare reimbursement for the most common type of stent procedure would be reduced by nearly 24 percent, according to an analysis by Gunderson. The cut would be 34 percent for a less-common procedure involving stents, metal-mesh devices used to prop open coronary arteries.

Reimbursement for defibrillators — which detect and electrically correct dangerous irregularities in heart rhythm, and can cost more than $40,000 to implant — would drop by 24 percent. Coverage for pacemakers — which use a mild electrical current to speed a slow heartbeat — would drop 13 percent.

Medicare officials said in a statement that the rules reflect Congressional concerns "that the existing system may create incentives for certain hospitals to 'cherry-pick' more profitable cases."

Among the most profitable surgeries involve defibrillators. Use of implantable models has grown from about 21,000 in 1995 to between 250,000 and 300,000 this year, according to the Heart Rhythm Society, a nonprofit group of cardiac care specialists.

Medicare last year agreed to expand coverage because a government-funded survey showed defibrillators significantly reduced deaths in patients with even mild heart disease, which also led to expanded coverage by private insurers.

AdvaMed, an industry organization whose members include device makers, questions the rationale for the reimbursement cuts and is pledging to fight them.

"Newer medical technologies are allowing patients to recover faster and often reduce overall medical and social costs," said Ann-Marie Lynch, an executive vice president at AdvaMed.