Left to Their Own Devices

Scandals, recalls, stingy customers, anxious regulators—any one of these would traumatize a chief executive. America’s industry for medical devices is suffering from all of them. Omar Ishrak, the new boss of Medtronic, the world’s biggest medical-technology company, recently described the problem succinctly to analysts: “There is a lot of work ahead of us.”

This is a relatively new ailment for the industry. From 1998 to 2005 the use of equipment such as defibrillators and drug-eluting stents expanded rapidly. “It was the age of implantation in this country,” explains David Lewis of Morgan Stanley, with companies “sticking things into everybody.” Much has changed.

Economist chart devices

America’s new health-care law includes a 2.3% tax on medical devices, but this is trivial compared with other shifts. Health plans are forcing patients to pay a larger share of costs, so those who do not need a device urgently are slow to buy them, says Matthew Dodds of Citigroup. Firms used to boost sales by wooing doctors, but doctors are now increasingly employed by hospitals and companies themselves are adopting stricter ethics rules. Meanwhile the pressure on prices is only growing more intense. Hospitals, squeezed by lower government payments, are squeezing companies in turn, refusing to pay more for a new product that is only slightly better than the old version.

Unfortunately firms have not had much else to offer. Like Big Pharma, which introduced many “me too” drugs, device companies have sustained themselves by making small improvements to existing products. Spending on R&D has so far failed to yield many truly innovative devices, says Mr Lewis.

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