Medtech is generally viewed as a global marketplace, thanks to the growth of medical care in developing countries. Yet there is a significant variance in device prices between countries. The world’s most lucrative market for OEMs most definitely is the United States. Not only does the United States consume an exceptional number of medical devices in relation to its population, OEMs can charge more per unit due to the complex and unique American healthcare reimbursement system. Recent funding cuts to federal healthcare programs will have both short-term and longer, permanent effects on medtech’s most valuable market.

Many of us dread making small talk at cocktail parties and outdoor barbecues. An effective way of driving off more socially accomplished neighbors is to start a conversation about the U.S. healthcare system’s funding structure. Unlike other developed countries with single payer approaches, the United States uses a patchwork of public and private funding methods to cover $5.3 trillion in annual spending on all forms of healthcare. Many Americans believe that private insurance policies provided through employers and out-of-pocket payments by patients are the largest slice of the funding pie. This observation is correct but misleading. Through a variety of programs, the federal government covers more than 40% of Americans’ healthcare costs.

Four programs constitute $2.1 trillion in annual spending. They are:

• Medicare: Free/highly subsidized health insurance for those 65 and older.
• Medicaid: Free coverage for poor Americans under 65 as well as supplemental coverage for indigent elderly patients. Currently 51% of U.S. childbirths are paid for by Medicaid.
• Veterans Administration: Free hospital and medical services to current and former U.S. military members.
• ACA: Behind-the-scenes funding of affordable health insurance policies. Also called Obamacare.

There are other federal healthcare funding initiatives but these programs comprise the bulk of U.S. government-provided medical coverage for citizens. Add state-funded programs and almost 55% of U.S. healthcare is paid by Uncle Sam.

Recent actions by the Trump Administration and U.S. Congress have reduced the government’s commitment to funding healthcare. The “Big, Beautiful Bill” signed by the President in July will phase in cuts to Medicaid, Medicare, and ACA over the next five years, extracting $1 trillion in healthcare spending. Consequently, an estimated 11 million Americans (or about 3% of the country) will lose their health insurance. Others will see restricted coverage or reduced payments, and likely have to finance the shortfall themselves.

Do these cuts matter to the medtech industry? On the surface the numbers are modest. This year, medtech is a $625 billion industry. The U.S. comprises 4% of the world’s population, so in half a decade the impact will be around $25 billion. Noticeable, but not overwhelming, right? Wrong. Despite representing 4% of the globe’s inhabitants, the United States represents 37% of healthcare spending. How is this possible?

Numerous factors drive the overconsumption of medtech in America. The first is the philosophy behind U.S. healthcare. While it is designed to maintain high quality standards—as with all developed nations—the U.S. also prioritized healthcare’s accessibility. Compared to single-payer nations where non-essential care is often rationed (think three weeks for a non-emergency MRI in Canada) the United States prides itself on a free enterprise system that makes state-of-the-art technology and services available to most consumers with little delay. Not surprisingly, this exceptional infrastructure of facilities and providers costs lots of money. The second, and more pressing, issue is the United States overpays for medtech compared with the rest of the world because the government is largely prohibited from bargaining for medical devices.

In almost every other country, the main customer for medical devices is not the patient, doctor, or hospital but rather, a national health service. These government-run organizations negotiate with medtech companies to obtain the best price they can in exchange for a guaranteed number of purchases. The United States has, until recently, been legally restricted from bargaining. Its role has been to pay for devices approved by doctors, hospitals, and insurance companies within certain reimbursement guidelines. Despite boasting massive pricing power in representing more than 100 million potential patients, the U.S. government has largely been merely a check-writer. In the last three years progress has been made to permit Medicare to negotiate for pharmaceuticals and devices but it is not expected to become a widespread practice in the near future. 

Since the United States is the biggest, richest market for medtech, there will certainly be serious implications to the government’s healthcare spending cuts. Three in particular stand out, all deleterious to the medtech industry:

• Declining demand beyond the cuts. The loss of Medicaid and Medicare funds as well as unaffordable ACA policies are likely to reverberate well beyond these programs’ beneficiaries. Many rural and inner-city hospitals focused on serving the poorest Americans rely on government payments to keep their doors open. Financially marginal operations already, these facilities will be forced to shutter departments or close for good, creating care deserts. However, it cannot be assumed that poor and ill patients will simply go to a more prosperous hospital and be greeted with open arms. Pushing these facilities to close will lead to a decline in services even for the patients qualifying for reimbursement. Delayed or eliminated services may cause overall medical care costs to rise as patients without coverage hold off on treatment until a costly emergency develops. Cutting medical services to the poor will destroy a portion of the U.S. healthcare infrastructure actively consuming medical devices. Once lost, these device sales will not be fully regained.
• Acceleration of VBR leading to fewer unit sales. With declining reimbursements, expect to see even faster implementation of value-based reimbursement (VBR). Currently constituting about 60% of U.S. reimbursements, VBR involves a payer— either the government or a private insurance company—making a single payment to a doctor and hospital to treat a specific condition. Any additional costs such as infections, re-admissions, or complications are usually borne by the healthcare providers. While this system drives less safe, productive providers and products from the medical system, it also reduces overall device spending. This outcome is beneficial for society but puts pressure on the device industry.
• Suppression of product development. While U.S. spending cuts will have impact on demand, a more nefarious outcome may be a slowdown of the product development pipeline. Against the backdrop of a growing $625 billion industry, the impact seems slight but that is not the case. Given America’s penchant for spending more than any other nation on medical devices, the market has skewed to developing new products that are certain to be a success in the U.S. market. Of course, most products in development are designed to sell worldwide but the needs of the lucrative American market come first. With pressure on U.S. sales due to the reduction of reimbursement, some of the near $50 billion spent on device research and development (product development) will be constrained. While new products will reach the market, there will probably be a long-term decline in the variety of solutions being offered. 

Although the decline of reimbursements through federal funding may lead to some rationalization of an arguably over-rich American medical system, the impact on the medtech industry will be series of drags that results in products with thinner profit margins and lower manufacturing runs. The sector will not be crippled but marginal companies, startups, and even established OEMs will face demand pressures. Many of these pressures will be triggered by the U.S. government becoming less willing to fund product development for the rest of the world.

MORE FROM THIS AUTHOR: A Tariff Survival Guide for the Medtech Supply Chain

Tony Freeman is the president of A.S. Freeman Advisors, a firm concentrated on the merger and acquisition and valuation consulting needs of the medical supply chain as well as other precision industries. Freeman can be reached at tfreeman@asfreeman.com.