Shift in Medicare payment rules could hurt Boston Scientific

The federal government is proposing a sweeping overhaul of how it pays hospitals for heart-device implants and other high-priced medical procedures, a change that could cut into sales for Boston Scientific Corp. and other companies that make medical devices.

A new draft Medicare rule is designed to balance out a system in which hospitals make significantly more money performing some procedures than others. Heart-device makers are major beneficiaries of the current payment rules because their stents and defibrillators are implanted in some of the most lucrative procedures.

If the proposed changes go into effect, hospitals on average could receive up to about 33 percent less for some stent procedures, from $11,400 to $7,600, according to analysis by the securities firm Piper Jaffray. For implantable defibrillators, payment could drop by about 24 percent, from $41,000 to $31,000 for one type of procedure. Actual costs vary at hospitals across the country.

The draft changes were released Wednesday night and are open to a 60-day public comment period. Hospitals and medical-device makers are expected to lobby heavily for modifications, and some of the cuts are likely to be less dramatic when the final version is published in August.

''I don't suspect that this is the end of the world for everyone. It's just a tougher world," said Bruce Nudell, a medical-device analyst for Sanford C. Bernstein & Co.

In a research note, Nudell said the cuts were ''more extreme than we expected," and that hospitals would likely push manufacturers for lower prices, cutting into their profits.

Boston Scientific, based in Natick, is seen as particularly vulnerable to a sharp change in Medicare payments for heart procedures because its major source of profits is drug-coated stents, tiny tubes that hold open cleared coronary arteries. Since they were introduced in 2003, drug-coated stents have become the fastest-selling medical device in history. Boston Scientific has about half of the $6 billion-a-year worldwide market.

In the next week, Boston Scientific expects to close its $27 billion purchase of Guidant Corp., an Indiana company that makes implantable defibrillators. The success of the merger relies on sustaining stent sales and increasing sales of defibrillators over the next several years.

Deep cuts in Medicare payments would make that job more challenging. Medicare pays for nearly half of the stent implants in the United States, and for about two-thirds of all defibrillator implants.

Advamed, the national lobbying group for the medical-device industry, released a statement yesterday warning that the cuts would have ''disproportionately negative effects on patients receiving advanced medical treatments."

In a separate statement, Paul Donovan, a Boston Scientific spokesman, emphasized that the proposal was a draft version. He said the company would study it and weigh in during the comment period.

''We will recommend changes designed to ensure that the final regulation preserves the fullest possible beneficiary access to innovative technologies and therapies," Donovan said.

The company's stock fell on the news yesterday, dropping 61 cents to close at $21.55, down nearly 3 percent. Shares of competing device makers also tumbled. Medtronic Inc. of Minneapolis dropped $1.11 to close at $49.93, losing more than 2 percent, and St. Jude Medical Inc. of St. Paul lost 95 cents to close at $35.90, down 3 percent.

Healthcare policy analysts say Medicare's rule changes are driven by increasing realization by federal officials that some procedures, such as coronary artery repair and certain kinds of surgery, are reimbursed at a higher profit margin than others.

''You have a distortion of resources toward that group, so people want cardiac units in their hospital, and they don't want burn units or psychiatric units or something that's less profitable," said Joseph Newhouse, a Harvard University healthcare economist who served on a congressional commission that reviews the Medicare payment system.

One focus of the changes is a new type of hospital, called a ''specialty hospital," often owned by doctors. Many of them specifically recruit patients who are candidates for heart repair surgery and other profitable procedures.

Although there are no such specialty hospitals in Massachusetts, local healthcare facilities will likely feel some impact from the changes, said Joe Kirkpatrick, vice president of healthcare finance for the Massachusetts Hospital Association.

Even within large hospitals, cardiac procedures often subsidize money-losing parts of the operation, such as providing care for sick patients who do not need surgery. The changes are ''going to be a big scramble for hospitals -- they'll have to make adjustments," Kirkpatrick said.

Overall, Massachusetts hospitals will see a slight increase in Medicare payments because of the changes, but not enough to keep pace with inflation, said Kirkpatrick.

Stephen Heuser can be reached at sheuser@globe.com.