Medtronic 2016 Annual Report Download - page 24

Table of Contents
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Strong product quality is critical to the success of our goods and services. If we fail to meet these standards and our products are
the subject of recalls or safety alerts, our reputation could be damaged, we could lose customers, and our revenue and results of
operations could decline. Our success also depends generally on our ability to manufacture to exact tolerances precision-engineered
components, subassemblies, and finished devices from multiple materials. If our components fail to meet these standards or fail
to adapt to evolving standards, our reputation, competitive advantage and market share could be harmed. In certain situations, we
may undertake a voluntary recall of products or temporarily shut down production lines based on performance relative to our own
internal safety and quality monitoring and testing data.
Further, we have elected to self-insure with respect to product liability risks and any product liability claim brought against us,
with or without merit, could be costly to defend. See "Our insurance program may not be adequate to cover future losses." Any
of the foregoing problems, including product liability claims or product recalls in the future, regardless of their ultimate outcome,
could harm our reputation and have a material adverse effect on our business, results of operations, financial condition, and cash
flows.
Health care policy changes, including U.S. health care reform legislation, signed in 2010, may have a material adverse effect
on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal
government, state governments, regulators, and third-party payers to control these costs and, more generally, to reform the U.S.
health care system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of
reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some
or all of these proposals could have a material adverse effect on our financial condition and results of operations.
The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010
provide for a number of healthcare policy changes that are or will be applicable to us. However, certain provisions of the law are
not yet effective and there are many programs and requirements for which the details have not yet been fully established or
consequences not fully understood, and it is unclear what the full impacts will be from the law. The legislation provides for
significant new taxes on medical device makers in the form of a 2.3 percent excise tax on all U.S. medical device sales that
commenced in January 2013. Although the excise tax has been suspended by Congress until the end of 2017, its status is unclear
for 2018 and subsequent years. Under the legislation, the total cost to the medical device industry is expected to be approximately
$20 billion over 10 years. The law also focuses on a number of Medicare provisions aimed at improving quality and decreasing
costs. It is uncertain at this point what negative unintended consequences these provisions will have on patient access to new
technologies. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness
research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate
alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally,
the law includes a reduction in the annual rate of inflation for Medicare payments to hospitals that began in 2011 and the
establishment of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending.
We cannot predict what health care programs and regulations will be ultimately implemented at the federal or state level, or the
effect of any future legislation or regulation. However, any changes that lower reimbursement for our products or reduce medical
procedure volumes could adversely affect our business and results of operations.
Our insurance program may not be adequate to cover future losses.
We have elected to self-insure most of our insurable risks across the company, and we made this decision based on cost and
availability factors in the insurance marketplace. We manage and maintain a portion of our self-insured program through a wholly-
owned captive insurance company. We continue to maintain a directors and officers liability insurance policy with a third party
insurer that provides coverage for the directors and officers of the company. We continue to monitor the insurance marketplace
to evaluate the value of obtaining insurance coverage for other categories of losses in the future. Although we believe, based on
historical loss trends, that our self-insurance program accruals and our existing insurance coverage will be adequate to cover future
losses, historical trends may not be indicative of future losses. The absence of third-party insurance coverage for other categories
of losses increases our exposure to unanticipated claims and these losses could have a material adverse impact on our consolidated
earnings, financial condition and/or cash flows.
If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, our results of operations
will suffer.
We may experience decreasing prices for our goods and services due to pricing pressure experienced by our customers from
managed care organizations and other third-party payers, increased market power of our customers as the medical device industry
consolidates, and increased competition among medical engineering and manufacturing services providers. If the prices for our
goods and services decrease and we are unable to reduce our expenses, our results of operations will be adversely affected.