NEW YORK ( TheStreet) -- General Electric ( GE) lost some tough lobbying battles over healthcare legislation, but the overall outlook for its $16 billion healthcare business hasn't changed much.
The company essentially took two big blows from the new healthcare bill. First, its sales of a wide range of medical devices from heart monitors to pacemakers will be subject to a 2.3% tax. Second, hospitals and doctors who order diagnostic imaging tests such as CT scans and MRIs will not get reimbursed by Medicare as much as they used to. That cuts down on their incentive to use the machines made by GE and other medical device manufacturers like Stryker Corp ( SYK), Koninklijke Phillips ( PHG)and Siemens AG ( SI) Mark Vachon, the head of GE's healthcare business in the Americas, had hoped to do better. The executive told analysts in October that GE was "getting a lot of traction" with attempts to persuade Congress to eliminate a tax on imaging devices. "I've got an apartment in D.C., you know," he quipped, alluding to the amount of time he had spent lobbying on the issue. Those efforts proved unsuccessful in the end, however. Imaging will be subject to the tax, as well as cuts to reimbursement expected to add up to roughly $4 billion over 10 years. GE also dropped its membership in a lobbying group, the Advanced Medical Technology Association (AdvaMed), hinting at possible tensions over the issues. St. Jude Medical ( STJ) quit AdvaMed last fall, stating in a letter that it objected to proposals the trade group supported that asked the larger members of the group to bear a greater share of the tax than the smaller ones, according to a Dow Jones Newswires report in November. A GE spokesman confirmed the company dropped its membership in AdvaMed on Feb. 17, but stated in an e-mail message to TheStreet "there is absolutely no connection between our departure from AdvaMed and health reform," saying GE made the break because "we have several other industry forums in which we participate. The timing was simply a business decision." A GE spokeswoman declined to comment on the healthcare bill's overall impact on the company.
An AdvaMed spokesman declined to discuss why GE left the trade group. Brett Loper, an executive at AdvaMed, said the medical device tax could have been far more punitive than it turned out. Dave Fisher, an executive at the Medical Imaging & Technology Alliance, which counts General Electric among its members, said the lower reimbursement rates for imaging procedures are actually an improvement over a rule that went into effect Jan. 1 Regardless of whether the lobbying should be characterized as a complete failure or only a partial one, GE Healthcare in the end has bigger fish to fry. GE Healthcare saw $16 billion in revenues in 2009, slightly more than Medtronic ( MDT)'s $14.6 billion. Medtronic has said it expects to take a $150-200 million annual earnings hit beginning in 2013 as a result of the tax. But Medtronic just sells medical equipment, and U.S. sales are about 40% of its overall business. By contrast, GE gets just 10-15% of its healthcare profits from U.S. equipment sales, according to a presentation in October by John Dineen, the U.K.-based head of GE's global healthcare business. "This is not just a U.S. hardware company. Everyone thinks CT or diagnostic imaging, which is our roots. This is a diverse business," Dineen told analysts. That didn't keep it from seeing a decline in sales in 2009 after several years of impressive growth. The $16 billion revenue figure last year took GE Healthcare back below where it was in 2006. Nick Heymann, an analyst at Sterne Agee says it is emerging markets sales that will truly "move the needle," for GE Healthcare, which he estimates accounts for about 13-14% of the parent company's earnings. "The issue for them is 'how do I figure out how to accelerate the rise of the middle class in emerging markets so advanced healthcare can become more purchased by their governments and more prevalent throughout the majority of the populace?' and at this point it doesn't have the critical mass to make the necessary ROE available to them," Heymann says. "You need 35-45% of populace in middle class and that's China by the middle of the decade, India the latter part of this decade, South America the latter part of decade."
Dineen said during his presentation that emerging markets sales continue to grow at a 15-20% rate, but he and other executives for the unit are also counting on the U.S. business bouncing back. That means not just equipment sales, which Dineen suggested could be revived now that there is some certainty about what shape the new U.S. laws will take, but other areas, like GE's biotech business, or healthcare IT, which looks to get a big lift from the big Federal stimulus package passed last year. In short, General Electric is so big and so tied to the overall economy, even something as significant as U.S. healthcare reform barely seems to make a difference. -- Written by Dan Freed in New York.