Spending has skyrocketed, and production is due to follow.

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Prior to 2000, medical-device and equipment production generally grew at a faster rate than real (inflation-adjusted) medical-care spending. Since then, production and spending have grown at similar rates, perhaps because several groups in the healthcare industry over the years set out to expand coverage for the uninsured.

But even though the general rates of growth changed and there was a greater emphasis by industry to cover the uninsured, until recently the market continued to function according to its historic cyclical pattern. In general, production of medical devices and equipment lagged medical-care spending by six to 12 months. And production saw a peak in growth rates every two years, almost like clockwork.

However, since the passage of the Affordable Care Act (ACA) in 2010, the normal cyclical patterns have broken down, making it much more difficult to see the future direction of the medical-device/equipment industry. In the accompanying chart, note how the regular ups and downs of medical-equipment production (the blue line) have become irregular since 2010. What was once a lag time of six to 12 months between medical-care spending and medical-device/equipment production seems to have become a two- to three-year time lag. And the regular market cycle between peak growth rates in production every two years has vanished.

Throughout 2013, real medical-care spending grew at a decelerating rate. I believe that the decelerating growth in medical-device/equipment production in 2015 is correlated with the decrease in spending in 2013.

As the ACA expanded insurance coverage, real medical-care spending has skyrocketed. The annual growth rate of medical-care spending has accelerated unabated since the end of 2013. 

If my assumed correlation above is true, then medical-equipment production should begin to grow at an accelerating rate sometime in 2016. It has been about two years since the slowest rate of growth in medical-care spending. Therefore, we should expect the slowest rate of growth in medical-equipment production to come at any time, since the new lag between spending and production seems to be two to three years. That is, the blue line on the chart should stop going down and start going up at any time now.

Our index suggests this is already happening. The overall index seems to suggest that the medical-equipment industry has been contracting at a slower rate since the middle of 2015. The new-orders index grew in November and December for the first time since May 2015. The production index grew in November and was flat in December, as it seems to have bottomed back in July 2015. And, a number of the other sub-indices also seem to indicate that the industry has reached a bottom and is beginning to improve.

ABOUT THE AUTHOR

Steven Kline Jr. is part of the fourth-generation ownership team of Cincinnati-based Gardner Business Media, which is the publisher of Plastics Technology. He is currently the company’s director of market intelligence. Contact: (513) 527-8800 email:skline2@gardnerweb.com; blog: gardnerweb.com/economics/blog