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a broad range of non-electromedical equipment, with many of the industry’s largest companies (such as Johnson & John- son) producing dozens of different industry-relevant instru- ments and supplies. This diversity of product lines insulates companies (and, in turn, the industry as a whole) from ex- treme volatility, as fluctuations in demand for any one specific product have only a limited impact on overall revenue. Moreover, some industry products function as cost-


effective replacements for one another; as such, during tough economic times, buyers looking to reduce their purchase costs may simply switch from buying one industry product to another less expensive industry-produced alternative. The largely nondiscretionary nature of the majority of the indus- try’s products further contributes to industry stability. Operat- ing rooms, for example, always need surgical equipment and demand for surgery is relatively inelastic. As a result, when operating rooms are looking to cut costs, they are more likely to buy less expensive surgical equipment rather than stop purchasing industry products altogether.


Growing Volatility As a result, medical instrument and supply manufactur- ers have experienced steady revenue growth during the past five years, even as the economic recession and subsequent recovery introduced some uncertainty to the generally stable demand environment. Industry companies rely on research dollars to drive new product development; according to a 2012 study in the New England Journal of Medicine, nearly half of all annual R&D funding in the United States is at least partly dedicated to medical research and product develop- ment. In the wake of the recession, an unsteady R&D funding environment slowed growth for firms heavily reliant on R&D, such as those specializing in cutting-edge products based on biotechnology or high-performance synthetic materials. But as the national economy continued to recover from


the recession, R&D funding steadily grew, encouraging new product development and, in turn, increasing demand for industry products. The percentage of Americans covered by public or private health insurance has grown significantly since 2010, as the unemployment rate dropped and the implementation of PPACA expanded Medicare and Medicaid and opened state private insurance exchanges. Driven by this underlying growth in demand for medical services, industry revenue has grown since 2010 and is expected to continue to grow during the five years to 2020.


Reform and its Impact However, the PPACA hasn’t been all good news for indus-


try operators. In order to foot the hefty bill for the expansion of public healthcare financing, the Centers for Medicare and Medicaid Services (CMS) have implemented a number of pol- icies intended to cut costs and generate funding, and many of these programs have had a direct impact on the supply chain for medical instruments and supplies. According to the American Association for Homecare, reforms to the CMS’s competitive bidding process for durable medical equipment (DME) have resulted in delays and inefficiencies for Medicare beneficiaries looking for access to industry-produced equip- ment such as walkers and crutches. Moreover, in 2013, a 2.3% excise tax on the domestic sale of medical devices to healthcare providers went into effect, designed to raise more than $30.0 billion for Medi- care and Medicaid expansion, according to the New York Times. This tax is levied on equipment ranging from heart valves to X-ray machines, and has already had a significant effect on profit for many industry companies. The tax is particularly damaging to producers of relatively unsophisti- cated industry goods, such as tongue depressors. Margins on these products are already razor-thin, kept low by high levels of competition from the large number of domestic and foreign producers who can produce these largely homoge- neous goods, and producers are generally unable to pass increased costs (such as the 2.3% tax) on to customers in this price-competitive environment. Nonetheless, IBISWorld expects the industry’s defini- tional characteristics (wide range of product lines, inelastic demand) to continue to support steady revenue growth during the next five years, regardless of potential short-term profitability and demand hiccups. Small industry companies that specialize in a particular product line will continue to be the most vulnerable to demand shifts or regulatory changes, while large, diversified manufacturers will be better able to manage these fluctuations. Moreover, well-established industry companies with respected brand names will likely be able to leverage the value of their reputation to margin- ally increase prices, partly covering the growing costs of regulation. Legislation designed to simplify CMS rules on DME reimbursement or repeal the medical device excise tax could have an impact on industry operations in coming years, as could threats to overhaul the PPACA. However, IBISWorld does not expect any of this legislation to come to fruition in coming years, and the industry as a whole will likely continue to benefit from growing health insurance coverage across the United States during the five years to 2020.


17 — Medical Manufacturing 2015


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