Final Medicare Payment Changes Still Benign For Device Cos

Final changes to Medicare hospital-reimbursement levels for the upcoming U.S. fiscal year appear slightly improved compared with a generally benign earlier proposal, suggesting the system won't create headaches for medical-device companies in the near term.

Many pricey devices such as implantable defibrillators and heart stents are sold to hospitals, which often recoup their costs from Medicare payments tied to various types of procedures. While the link between Medicare payments and device prices is tenuous, the annual Medicare changes are still watched closely for clues to potential pricing trends for companies such as Medtronic Inc. (MDT), Boston Scientific Corp. (BSX) and Johnson & Johnson (JNJ).

The scrutiny is particularly strong as investors and analysts speculate on what health-care reform could mean for device companies, and whether hospitals that feel squeezed by the government will pinch device prices as a result.

For the fiscal year starting in October, at least, the Medicare system that sets reimbursement rates doesn't look like a major source of that pressure.

Wells Fargo analyst Larry Biegelsen described the final rule from the Centers for Medicare & Medicaid Services as "positive," while JPMorgan's Michael Weinstein called it "a little good news from D.C."

The Medicare report was issued late Friday. Stocks early Monday were mostly up amid small changes for some big device companies including Medtronic, Boston Scientific, heart-device maker St. Jude Medical Inc. (STJ) and orthopedics firms Zimmer Holdings Inc. (ZMH) and Stryker Corp. (SYK).

Analysts described the final rule from CMS, which appeared to bump up reimbursement levels for some devices, as modestly improved compared with April's proposal. The final version also postponed a plan to hit hospitals with an adjustment triggered by hospitals wringing money out of a newer system that ties payments to the severity of patients' condition.

Analyst Weinstein calculated reimbursement improvements for drug-coated heart stents and implantable defibrillators, and he and other analysts pointed to favorable reimbursement adjustments for orthopedic devices such as replacement joints and spinal implants.

Weinstein said that higher payment rates across most categories are unlikely to be passed through to device makers "in any significant way," but will instead help hospital profitability. He also noted that movements in device prices and Medicare payment rates aren't tightly correlated.

"Still, we view this as a positive outcome for the MedTech group, particularly in an environment when favorable news from Washington has been increasingly harder to come by," Weinstein said.

Overall, CMS on Friday said that acute-care hospitals will receive an inflation update of 2.1% in their payment rates for fiscal 2010.

The proposal in April to start making adjustments in the coming year to recoup excess spending linked to the shift to severity-based payments would have nearly offset the inflation update. But CMS said it decided not to implement an adjustment until it has a full year of fiscal 2009 data. The agency will consider phasing in future adjustments over an extended period starting in fiscal 2011.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; [e-mail]