PICTURE OF HEALTH

A manufacturer asked his distributor if there had been any interest in his newest products that were on display. “I have good news and bad news,” the distributor replied. “The good news is that one gentleman inquired about your products and wondered if they would appreciate in value after your death. When I told him they would, he bought all of them.”

“That’s wonderful!” the manufacturer exclaimed. “What’s the bad news?”

“The man was your doctor.”

In many ways, this tale is a shadow of the good news-bad news scenario facing the medical device manufacturing market. Think this through with me for a moment.

We have good news. Almost 180,000 U.S. companies develop, test, market, package and distribute medical instruments and equipment in the $266 billion global medical device manufacturing market. The U.S. healthcare market is the world?s largest.

U.S. medical device manufacturing exceeds $90 billion and has been growing approximately 6 percent annually up to this year. Furthermore, 16 of the top 25 medical device companies are U.S.-based and account for 72 percent of the revenue.

Most importantly, 80 percent of medical device company profits come from products introduced in the last five years. This is one reason the U.S. medical technology industry continues to grow despite a challenging market related to the global credit situation.

According to Richard Ramko, the U.S. medical technology leader for Big Four auditor Ernst & Young (New York, NY), “The industry is poised for growth due to aging populations, the wider prevalence of chronic diseases, and an expected surge in demand for companion diagnostics to accompany new generations of targeted therapies.”

For example, cardiovascular devices are being fueled by an aging population and quickly developing drug-device combinations. This same theme flows through many medical sectors. As baby boomers age and hearts fail, bones get broken and teeth go bad, the growing need for new medical devices translates into more demand to manufacture imaging, infusion therapy, orthopedic, in vitro, dental, cardiovascular and surgical devices.

This explains why Dan Meckstroth, the chief economist for the Manufacturers Alliance/MAPI (Arlington, VA), says, “Only a couple of industries will continue to grow in recession, and medical equipment/medical supplies is one of them.”

A recent report from service bond agency Fitch Ratings (New York, NY) agrees. “The relatively non-discretional nature of medical devices should support demand growth for this part of the healthcare industry in 2009, in spite of rising unemployment and economic challenges. New product introductions are expected to shift the competitive advantages between individual device makers, but the overall industry should generate sufficient cash to fund their operations and strategic initiatives while preserving their credit profiles.”

Even those with mixed results see the glass as half-full. The Semiannual Economic Forecast released by the Institute for Supply Management (Tempe, AZ) is optimistic about the second half of 2009, as 45 percent of those surveyed expect the second half to be better than the first half. Only 16 percent predict it to be worse and 39 percent see no change at all.

Medical markets historically show more resilience than others in the face of economic downturns, with only elective sectors such as aesthetics and dental devices being vulnerable.

“That’s wonderful!” you are now exclaiming. “What?s the bad news?”

By 2017, one dollar out of every five spent in the U.S. will go toward healthcare costs, according to Health Affairs. For this staggering cost, a recent study from the Commonwealth Foundation (Harrisburg, PA) found that “the U.S. healthcare system ranks last or next-to-last on quality, access, efficiency, equity, and healthy lives for a high performance health system.”

This wildly expanding cost is unsustainable for a system that has become a national embarrassment. Nowhere is change more needed than in healthcare, and with Barack Obama?s call for a major expansion of the government?s role in controlling this industry, we?re about to get it.

“His central proposition is that Uncle Sam can intervene to improve the quality of healthcare provided in the U.S. by requiring doctors and hospitals to prove they provide quality care through a plan that links payment with reported quality,” explains Dr. Michael Ragain, the chairman of Family Medicine at the Texas Tech University Health Sciences Center (Lubbock, TX).

But to do this, an army of new bureaucrats must be hired by the government to keep their all-seeing eyes on the doctors and hospitals to ensure quality. In turn, healthcare providers must hire larger staffs to collect and produce the “reported” data correctly.

“As these new structures evolve, the law of averages will prevail and the actual care will migrate to a median level of quality,” continues Dr. Ragain. “The net result will be little improvement in care, and significant increase in the cost.”

High administrative overhead is already a major problem in our current system. The New England Journal of Medicine states that 31 percent of health care expenditures in the U.S. already go to administrative costs.

Yet Obama wants to increase this burden further by creating still another bureaucracy to regulate the health insurance industry. When Congress gets on board, universal healthcare will go on and on with government intervention of all sorts.

The end game here is a central government that mandates price controls for all medical procedures – a mandate with a bureaucratic reach that will rewrite that earlier good news for medical device manufacturers into bad news.

To be honest, the appeal of price controls is easy to understand, even for those of us who are not socialists. They may fail to protect many “elite” consumers, perhaps even hurt some, but price controls hold that superficial promise of protecting those “others” who simply cannot make ends meet.

However, history teaches us that, among other things, price controls distort the allocation of resources. Price ceilings that are invoked to prevent prices from rising above a certain maximum will eventually cause artificial shortages. Price floors that are used to prohibit prices from falling below a certain minimum will eventually generate artificial surpluses.

In the Age of Lean, these artificial shortages/surpluses will trickle further distortion down into the allocation of resources throughout the entire supply chain and disrupt the business of those manufacturers who develop, test, market, package and distribute medical instruments and equipment.

In other words, price controls will severely impact bottom lines where 80 percent of the profits have depended on products introduced in the last five years. Count on it.

So here’s our scenario: We have good news, we have bad news, we have a doctor whose name is Obama. And the doctor is in.