Inflation has increased the costs for medical device companies to manufacture and ship devices and implants. Now, device companies may try to renegotiate contracts to pass along some of those increased costs.
The U.S. inflation rate was 8.5 percent at the end of March, the highest rate in more than 40 years. Device companies are paying more for the materials to produce their goods; labor and shipping costs are also up.
Stryker's executives discussed the inflationary pressures the company is facing during an April 28 earnings call. The company said inflation is driving challenges with its gross margin. The tight supply chain has also resulted in more overnight deliveries to customers, which are costly. The company is using more air freight than more economical modes of transportation because of supply shortages, costs and urgency to deliver medical products.
"I do see some of that easing up, but I would tell you for the longer term, these labor costs, these transportation costs are probably a little more permanent than some of the other costs as we think about it," said Glenn Boehnlein, vice president and CFO of Stryker, during the earnings call, as transcribed by Seeking Alpha.
When asked directly by investors about whether the company would try to pass along the increased costs to hospitals and surgery centers, the company executives said they would evaluate new contracts by geographies and markets, but didn't have a one-size-fits-all approach.
Kevin Lobo, CEO of Stryker, said ASCs would be one area where the company would potentially see renegotiated contracts as the economy changes.
"Given the inflationary environment, we are obviously going to look at pricing actions across our portfolio," he said. "In some places, it's going to be easier than other places, given the nature of our contracts."
Surgery centers are also experiencing increased costs associated with staffing, overhead and personal protective equipment. ASCs, as small businesses, have always run on tight margins, and if device companies increase the price of implants without insurers also boosting the amount they pay, surgery centers may no longer be able to accommodate those procedures.
When supply costs exceed the amount surgery centers are paid per procedure, cases have to go back to the hospital.