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Zimmer highly exposed to health-reform risk

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Shares of Zimmer Holdings Inc. have generated impressive returns of 23 percent in the past year and some 2013 product launches could juice those results even further. But the Warsaw-based maker of orthopedic implants is also the most-exposed company in its industry to two key elements of health care reform: the medical device tax and bundled payments.

Zimmer, which is scheduled to report its fourth-quarter earnings Thursday, derives about 50 percent of its $4.5 billion in annual sales from the United States—a much higher proportion than any of its competitors.

Starting in the second half of this year, a new 2.3-percent tax on medical devices—created by the Patient Protection & Affordable Care Act—will start taking about a $50 million-per-year bite out of Zimmer’s revenue, according to estimates by multiple analysts.

“In our view, ZMH has lagged its competition in diversifying its business model, especially in expanding its emerging market exposure,” Stifel Nicolaus analyst Rick Wise wrote in a Nov. 19 report on Zimmer, noting that the company derives as much as 85 percent of its sales from the developed markets of the United States, Europe, Japan and Australia.

Also, Zimmer’s heavy reliance on U.S. sales means it has the most to lose from bundled-payment initiatives, which are being eagerly embraced by hospitals, according to an in-depth report on the topic issued by J.P. Morgan analysts in October.

That report, based on a survey of 46 U.S. hospital administrators, found that three-quarters of them plan to launch a bundled-payment initiative this year. And 52 percent of them already have submitted plans to Medicare to target orthopedics—a higher percentage than any category except general surgery, which 54 percent of hospitals plan to target.

Interventional cardiology (35 percent) and cardiac surgery (28 percent) were among the other big categories targeted for bundled-payment initiatives, according to J.P. Morgan’s survey.

Bundled payments will be launched this year by the federal Medicare program. Medicare will offer to pay hospitals one fee for a hospital stay or a hospital stay and recovery care. The payment would include fees for both hospital and doctors' services, discounted from the current Medicare fee schedules.

Any savings the hospitals and doctors could achieve below that discount would be theirs to keep, and divvy up according to their internal contracts.

The survey suggests that hip and knee replacement surgeries—Zimmer’s bread and butter—are at the top of the list for hospitals trying to save money under bundled-payment arrangements. They will be seeking to wring better pricing deals from orthopedic implant makers by choosing to source all their implants from as few manufacturers as possible. Also, they will be working to help patients avoid the need for joint replacements in the first place.

“Those most impacted are likely to be device and implant manufacturers as hospitals try to achieve both lower pricing on implants and lower utilization of supplies and devices,” wrote J.P. Morgan analyst Michael Weinstein.

Weinstein estimates that Zimmer derives 35 percent of its total sales from U.S. hip and knee implants—nearly twice as large a percentage as its nearest competitor, Michigan-based Stryker Corp.

“Under a Bundled Payments world, it is this mix piece [i.e., product volumes] that we see coming under more direct pressure,” Weinstein added. “In our large cap coverage, this would render Zimmer most exposed.”

 

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  1. These liberals are out of control. They want to drive our economy into the ground and double and triple our electric bills. Sierra Club, stay out of Indy!

  2. These activist liberal judges have gotten out of control. Thankfully we have a sensible supreme court that overturns their absurd rulings!

  3. Maybe they shouldn't be throwing money at the IRL or whatever they call it now. Probably should save that money for actual operations.

  4. For you central Indiana folks that don't know what a good pizza is, Aurelio's will take care of that. There are some good pizza places in central Indiana but nothing like this!!!

  5. I am troubled with this whole string of comments as I am not sure anyone pointed out that many of the "high paying" positions have been eliminated identified by asterisks as of fiscal year 2012. That indicates to me that the hospitals are making responsible yet difficult decisions and eliminating heavy paying positions. To make this more problematic, we have created a society of "entitlement" where individuals believe they should receive free services at no cost to them. I have yet to get a house repair done at no cost nor have I taken my car that is out of warranty for repair for free repair expecting the government to pay for it even though it is the second largest investment one makes in their life besides purchasing a home. Yet, we continue to hear verbal and aggressive abuse from the consumer who expects free services and have to reward them as a result of HCAHPS surveys which we have no influence over as it is 3rd party required by CMS. Peel the onion and get to the root of the problem...you will find that society has created the problem and our current political landscape and not the people who were fortunate to lead healthcare in the right direction before becoming distorted. As a side note, I had a friend sit in an ED in Canada for nearly two days prior to being evaluated and then finally...3 months later got a CT of the head. You pay for what you get...

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