Survey says…

Taking the temperature of surgeons and hospitals is one of Wall Street’s most helpful past times. Every month, one or two new surveys hit our desk. Lately these surveys have contained some surprises. So we thought we’d share them with you.

Hospitals First

Headlines tell us that hospitals are not in great shape. The big chains (Tenet Healthcare Corp., HCA or Universal Health Services) are reporting that admissions and earnings are slightly down and bad debt expenses are higher. Sounds pretty typical for a recession. So we were a bit surprised to see the results from Wells Fargo’s Hospital Volume Report on April 16.

This monthly survey of U.S. hospitals is conducted by IMS Health and Wells Fargo Securities LLC. The survey tracks data from 650 hospital representing approximately 9 million inpatient stays and 96 million outpatient visits annually and continues with 100% of inpatient and outpatient visits for all sample hospitals.

Here is the opening sentence from the report:

“Total inpatient admissions increased by 1.1% and outpatient visits decreased by 3.7%. Trends in the South were strong with inpatient admissions up 3.0% and outpatient was down 0.4%.”

In terms of sectors of care, Wells Fargo’s analysts wrote: “Ortho appears stronger than Cardio. Among ortho categories, growth rates for knees and hips improved in February whereas spine and shoulders got worse.”

So, here are the key points from Wells Fargo’s survey of hospitals in the U.S.

• Inpatient admissions increased by 1.1% and outpatient decreased 3.7% (year-over-year)

• Commercial inpatient admissions increased 3.6% and outpatient admissions increased 1.4%

• Inpatient orthopedic and neurological surgical visits increased 1.4% and 1.6%, respectively

• Total ER visits declined 0.2% with outpatient ER visits down 5.4% and inpatient ER visits up 1.5%

• Uninsured admits grew 14.7% (!!) based on inpatient ER visits for other payers which includes uninsured.

Orthopedic Hospital Volume Trends

Hospital Setting - Inpatient % Change

Source: Wells Fargo Equity research and IMS Health

Hospital Setting - Outpatient % Change

Source: Wells Fargo Equity research and IMS Health

Except for “Other” inpatient, most orthopedic hospital volume categories are either down or flat and all were surprisingly volatile. “Other” inpatient showed the most consistent and significant growth rates of any category.

Breaking this data down into its components also uncovered some reasonably surprising trends.

Visit Type - % Change

Source: Wells Fargo Equity research and IMS Health

A couple of trends stand out in this table. First is the seasonal pattern for shoulder visits. The best quarters are the first and third. The worst is the April-June (2nd) quarter. The other glaring message in the data is how different hip and knee growth trends are. Knees are weak and hips are strong. And finally spine hospital visits are clearly holding their own despite an increasingly challenging reimbursement environment.

Spine Surgeon Survey

Earlier this quarter Bank of America’s (BofA) medical technology analyst Bob Hopkins issued the results of his survey of 75 spine surgeons. Here are his summary points:

• Surveyed surgeons expect spine fusions volumes at their hospitals to be flat in 2012 after a 1% (on average) increase in 2011

• 79% of the surveyed surgeons do not expect fusion volumes to be lower in 2012

• 62% of the surveyed surgeons have not seen incremental pushback from insurance companies over the last three months

• For those physicians who are planning to shift share from one manufacturer to another in the near future, rep relationships were cited as the #1 reason for the shift. Price was #2 driver and technology was #3.

The Bank of America survey talked to surgeons in 25 states, with 40% being neurosurgeons and 60% orthopedic spine surgeons. The average size of hospital represented in BofA’s survey was 378 beds within a range of 200-1, 000. The average number of fusions performed by responding surgeons was 171 per year within a range of 75 to 400. Lumbar fusions were 49% of the fusions performed by responding surgeons. MIS fusion represented 34% of the fusions performed by reporting surgeons. Finally, Medtronic Inc.’s products were used in 30% of the fusions performed by responding surgeons (DePuy Orthopaedic, Inc. was 14%, Synthes, Inc., Stryker Corporation and NuVasive, Inc were roughly 10% each and other companies made up the remaining 27%).

Surgeon Expectations for 2012

Realized (2011) and Expected (2012) Year-Over-Year Change in Fusion Surgeries

Source: Bank of America, Bob Hopkins

Of those surgeons who report that they are expecting lower fusion volumes at their hospital in 2012, here are the most commonly mentioned reasons for a downturn:

• Insurance (38% of the respondents)
       ο Poorer insurance coverage
       ο Harder to get insurance authorization
       ο No insurance support for spine fusions

• The economy is down across the board
• Higher deductibles
• Volumes are dependent on group practitioners and the number in that group
• The number of spine surgeons in their area increased

Insurance Pushback

Interestingly enough, 61% of the surgeons surveyed said that they had NOT seen any change in insurance company payment policies; 39% did report that they were seeing more pushback from insurance companies. As to which types of fusions were triggering a negative insurance response, the most common answers mentioned were degenerative disc disease (DDD) and multi-level fusions.

Biologics

Of the surgeons surveyed 72% said that NO company had a biologic product which differentiated from Infuse. However, 28% said “yes” there are biologic products which have differentiated from InFuse. Which products were those?

Here are the most common responses:

• MSC’s (mesenchymal stem cell)

• Trinity

• Stem cells with autograft

• Actifuse

• OP-7

• NuVasive’s cancellous extract with stem cells

• Bioactive glass with autograft BMP (bone morphogenetic protein)

• Osteocel

• Stem cells

• Osteoprogenitor cell biologics

• DBX

• Osteocel plus

• Calcium triphosphate

Vendor Opinions and Forecasts

Of the surgeons surveyed 33% said that their hospitals are restricting the number of spine fusion product vendors allowed into the hospital and 40% said that their hospitals will be restricting vendors in 2012. As to vendor loyalty, spine surgeons remain a fairly stable group. Only 14% (1 in 7) said that they planned to switch more than 5% of their business to a new vendor in 2012 (although 17% said that they had switched recently).

Finally, which vendor did these surgeons believe would take the most share in their hospital over the next 12 months and which company would they expect to lose the most share?

Source: Bank of America, Bob Hopkins

Source: Bank of America, Bob Hopkins

All in all, the surveys are showing that the market for spinal implant products is proving to be more durable than the headlines about insurance company pushback might suggest. Wells Fargo’s hospital survey was certainly interesting and the weakness in knee visits combined with the unexpected strength in both hip visits and spine fusions shows the value of that survey.