Brace yourselves: the second round of the CMS? competitive bidding program is right around the corner. In winter 2012/2013, the CMS is expected to announce reimbursement cuts across a wide variety of medical device types that it perceives as over-reimbursed. The idea is that there are areas of health care in the US where costs can be reduced without hindering the quality of care, thereby hopefully streamlining costs in the US health care system?which, as we?ve discussed before, are a bit out of control relative to some other countries. In the first round of reimbursement cuts, which happened in 2010, reductions averaged about 32% across product categories such as hospital beds and diabetic supplies. This next round is anticipated to have even more severe cuts?around 42% ?and manufacturers are understandably bracing themselves for this decline.

In affected markets, these cuts will have a massive impact on revenues. Generally, it makes sense for manufacturers to offer prices in line with or less than reimbursement amounts to ensure that hospitals buy their products. As a result, markets that have reimbursement slashed will see dramatic declines in revenues in the year the reductions are implemented.

One market that's anticipated to feel the effects of these reductions is the market for negative pressure wound therapy (NPWT) systems. As part of the wound care biomaterial market, these systems are used to help heal wounds that the body is unable to heal on its own. NPWT systems are subject to the next round of competitive bidding after a recent study found that reimbursement for these systems was about 5 times higher than the actual cost of the system.

The implications for the NPWT system market are very severe. It's anticipated that hospitals will move away from using higher-end devices that are often rented and instead opt to purchase lower-end single-use devices. Basically, the NPWT system market will likely move toward devices that are simplified, less expensive, and increasingly used in a home care setting. Companies that offer these sort of devices and would likely benefit from this shift include Smith & Nephew (with its PICO system) and Spiracur (with its SNaP system). Companies that will be hard hit include Kinetic Concepts Inc. (KCI), which has primarily built its business around the larger traditional systems.

Aside from the NPWT system market though, the competitive bidding program will hit a number of medical device markets pretty hard. And even markets not affected by the first or second round of bidding should take note of what's happening?you never know who will be the next target for cost cutting.

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