Medical Supplies & Devices
SECTOR REVIEW
HC Reform: The Enormity of the Task Ahead
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U.S. healthcare reform will be the biggest challenge all medical supply and
device companies face over the near and long term. The big picture is not
sanguine and companies need to change their operating strategies to better
position themselves for the challenging times ahead.
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The MedTech sector is not (yet) directly in the target zone for reform but
nevertheless the tea leaves are not positive. Medicare needs major reform
to assure its sustainability. Greater government regulation in healthcare in
general is likely to be a net negative for MedTech as expanded utilization is
likely to be more than offset by cost control efforts. The healthcare issues to
monitor include Medicare changes, comparative effectiveness, increasing
pricing transparency (and pricing controls), and preemption. There are also
proposed tax changes that could be negative, though this would be the case
for many multinational corporations. We review healthcare reform all of
these topics in great detail within this report.
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Since the President’s address to Congress on February 24, the S&P 500
Healthcare Equipment & Supply index is down 17.4% worst than the
Healthcare sector as a whole (14.4%) and the S&P (down 11.6%), but better
than Managed Care (down 27.6%). We believe valuations reflect the
uncertainties abound and the stocks are unlikely to recover until more
specifics are released, which should occur over the coming weeks.
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Those that we believe are better positioned due to a combination of
geographic diversification and product portfolios are EW (Outperform), BDX
(Outperform), COV (Outperform), BAX (Neutral), and BCR (Neutral). Those
that may have challenges adapting to the changing landscape include BSX
(Neutral), STJ (Neutral), MDT (Neutral), SYK (Neutral), and ZMH (Neutral).

Table of contents
Credit Suisse MedTech One Page Summary 3
A Sector Under Pressure 4
Why Is The Pressure? 5
The President’s Budget 6
Timelines for the Budget 8
The Budget Is Similar To MedPAC’s Medicare Reform Recommendations 8
MedPAC’s Recommendations for FY 2010 9
High Profitability Within Healthcare Attracts Focus 9
The US is More Profitable Than Other Regions 11
Healthcare Reform Efforts That Could Affect MedTech 12
MedTech Sales Matrix 12
Medicare Part A (Hospital Payment) Reform 13
Gainsharing and Bundling Part A & B Payments 16
Comparative Effectiveness 17
Pre-emption 20
Greater Pressure on Managed Care or the 22
Establishment of a New Public Insurance Program 22
Tax Changes 22
Appendix 23
The US Healthcare System 24
Healthcare Issues 25
The Number of Uninsured Continues to Rise 25
Health Insurance Premiums Outstrip Wage Growth 25
National Health Expenditure Continue To Rise 27
How Does the U.S. Compare with Other Nations? 28
What’s Driving the Growth in US Healthcare? 30
The Key Players 32
Profitability Across Healthcare 33
Private Health Insurance 34
Medicaid and SCHIP 35
Medicare 35