The U.S. economic downturn is taking a big financial toll on hospitals, making it tougher for them to fund upgrades, buy new equipment and has reduced the number of patients seeking elective procedures, according to an American Hospital Association report released Wednesday.
This financial pressure has bled over to the medical-devices sector, where investors are worried sales will suffer as hospitals cut back on spending and patients postpone treatment plans. Companies such as Intuitive Surgical Inc. ( ISRG) and Covidien Ltd. (COV), which make expensive surgical robots and common medical products, respectively, have faced such concerns.
Hospitals "could be facing uncertain times as their financial health falters and ability to borrow funds for improving facilities and updating technology is squeezed," the American Hospital Association's report said.
The non-profit group's report, which is based on survey results from 736 hospitals and a Web-based reporting system, echoes trends financial analysts have recently noted based on their own surveys and industry checks.
More than 30% of respondents in the new survey reported a "moderate to significant decline in patients seeking elective procedures," the association said, while nearly 40% of hospitals reported a drop in admissions overall. Hospitals are also seeing more patients who can't pay.
Fewer elective procedures could be troublesome for makers of replacement joints such as Zimmer Holdings Inc. (ZMH), Stryker Corp. (SYK), Smith & Nephew PLC (SNN) and Johnson & Johnson's (JNJ) DePuy subsidiary. Orthopedic procedures to replace damaged hips and knees can resolve painful and often debilitating arthritic problems, but also carry sizable out-of-pocket costs.
Orthopedic companies didn't report issues on recent quarterly calls, but the possibility of a slow-down remains a big question.
"I would say at this point it is not unreasonable to believe that orthopedic growth rates might decelerate modestly because of the general economy," said Jeffrey R. Binder, president and chief executive of joint-maker Biomet Inc. ( BMET), on that company's recent quarterly call.
Shares of orthopedics companies traded lower on Wednesday. Zimmer was recently down 5.5% to $37.64 while Stryker, which also has a big surgical-products business, traded down 3.8% to $39.28.
Health-care is often a safe haven in times of economic trouble, but that theory may be eroding this time around. Treatment that can be delayed, or requires hefty payments even from insured patients, is vulnerable. The economy is clearly delaying people, Gary Ellis, Medtronic Inc.'s (MDT) chief financial officer, said in an interview Tuesday. Chairman and Chief Executive Bill Hawkins, speaking in the same interview, said the company's businesses for diabetes pumps, ear nose and throat tools and spinal products have some economic vulnerability.
Hawkins noted that hospital administrators are seeing volumes for some orthopedic procedures decline a bit. Patients "may just tolerate the pain," he said. But he also noted that Medtronic overall doesn't have major economic exposure. The company's big heart-device products, such as pacemakers and implantable defibrillators, treat serious issues.
Investment Declines
Along with a decline in patients, hospitals are also facing declines in their investment portfolios. Hospitals "rely on investment income as one of the ways to help make ends meet, especially since government payors do not cover the costs of care," the hospital association noted. But recent market turmoil has turned investment gains into losses.
Non-operating revenue among hospitals was down $831.5 million in the third quarter this year, compared with a $396.1 million gain a year earlier, the association said, citing hospital reports to "Databank," the Web-based reporting system.
The hospital association said the credit crunch has also made it more expensive for hospitals to borrow money. Hospitals saw interest payments on borrowed funds climb an average 15% from July to September, compared with the same period a year earlier.
"As a result, many hospitals are reconsidering or postponing investments in facilities or equipment communities rely on for care," the association said. For example, 45% of survey respondents are delaying purchases of clinical technology and equipment. Many respondents are also delaying renovations and investments in new information technology.
Amid this stress, Intuitive Surgical has faced fears hospitals won't be able to pay for its expensive "da Vinci" surgical robots, which cost nearly $1.4 million each. This hasn't been a problem so far, and the company's guidance for 2008 hasn't suffered. But the prospect of a future slowdown prompted William Blair analyst Ben Andrew on Monday to cut his financial forecasts for next year.
Andrew also lowered his rating on Intuitive to market perform from outperform.
Shares of Intuitive, which have fallen sharply this year, were down 1.8% to $ 121.32 in late trading. Speaking earlier Wednesday at a financial conference, company officials said Intuitive had been less impacted by cutbacks than other capital-equipment makers because its system helps hospitals increase their revenue.
When hospitals suffer during an economic swoon, the impact circles back to the economy at large. The association noted that 45% of new private-sector jobs were created in the health sector last year. Many hospitals are being forced to consider staffing and service cuts due to financial stress.
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