Follow up to CEO Health Care

by Jon Kamp
Of DOW JONES NEWSWIRES
CHICAGO (Dow Jones)--The federal government proposed stiff Medicare reimbursement cutbacks for heart products like pacemakers, defibrillators and stents, but the cuts may be softened before a new rule is officially determined later this year, clouding the potential impact for affected companies.
The U.S. Department of Health & Human Services' Centers for Medicare & Medicaid Services late Wednesday proposed sweeping changes in a 1,200-page report on reimbursement rates for hospital impatient procedures. The changes are targeted at closing reimbursement loopholes used by specialty hospitals and trimming overall costs. The proposals are expected to be implemented in October.
The reimbursement cuts proposed for some of the hottest and most lucrative heart devices in the medical device sector were steeper than some on Wall Street were expecting. Proposed changes for orthopedic products like replacement hips and knees, on the other hand, were surprisingly moderate.
The proposed reimbursement cuts would hit coronary devices that are major revenue drivers for companies like Medtronic Inc. (MDT), Boston Scientific Corp. (BSX) and merger partner Guidant Corp. (GDT), St. Jude Medical Inc. (STJ), Johnson & Johnson (J&J) and others. The products include implanted devices that control heart beats and stents, the tiny mesh tubes used to prop open arteries.
The proposed reimbursement cuts for stents top 30%, Morgan Stanley analyst Glenn Reicin estimated, while the proposed cuts for implantable defibrillators top 20%, he said.
Despite the severity of the cuts, it's not yet clear exactly what impact the companies with heart products will feel going forward. According to Reicin, investors have already priced in expectations for heavy cuts, and even if "radical changes" do make it through a long period of haggling and commentary, they may effect hospitals more than device companies.
"We think it is unlikely that these changes will modify purchasing and demand characteristics of medical devices," Reicin said in a research note late Wednesday. "Hospitals have traditionally had little leverage in reducing device costs."
Some companies with a major stake in cororary devices were down in premarket trading Thursday. Boston Scientific recently traded down 3.7% at $21.35, St. Jude was recently down 4.3% at $35.25, J&J was recently off 18 cents at $57.69 and Medtronic was recently down 1.3% at $50.39.
If the proposed changes are really damaging for hospitals and utilization, "we think that changes will be scaled back and have little likelihood for implementation," Reicin said.
In a note early Thursday, Leerink Swann analyst Jason Wittes concurred. "There is room for negotiation, and the final codes will likely be less dramatic," he said.
Bank of America analyst Glenn Novarro noted some of the proposed changes "were far worse than expected," and suggested a potentially more damaging impact for affected companies. In a research note late Wednesday, Novarro said the cuts "would serve as a significant negative" for medical device stocks if enacted.
The impact was much less dramatic for major orthopedic companies, as the only sizable reduction was proposed for spinal procedures. Among major orthopedics firms, Zimmer Holdings Inc. (ZMH) recently rose 1.5% at $66.50 in premarket trade and Biomet Inc. (BMET) gained 1.6% at $38.75
Morgan Stanley has an ownership stake in Biomet, St. Jude and Boston Scientific. The bank has had an investment banking relationship with Guidant, Medtronic and Biomet.
Bank of America or an affiliate has an ownership stake in Guidant and Medtronic, and the bank has had a banking relationship with Boston Scientific, Guidant, Medtronic and St. Jude.
-By Jon Kamp; Dow Jones Newswires; 312-750-4129
jon.kamp@dowjones.com