ANALYSIS-Ortho stocks may be vulnerable as job losses mount

By Debra Sherman

CHICAGO (Reuters) - Knee replacement surgery can cost an arm and a leg -- and can seem even more daunting during hard economic times.

Sales of knee and hip implants in the lucrative U.S. market slowed in the first quarter amid an overall decline in elective surgery. Some analysts say the trend may continue as job losses mount, insurance policies disappear and post-employment health coverage expires.

And shares of orthopedic device makers, historically a safe haven during an economic downturn, may be vulnerable. Demand for such devices is expected to remain strong over the long term as baby boomers age, but signs of a short-term hiccup have emerged.

"Historically, these procedures haven't been affected by the economy. What has changed since the last big recession is that people's co-payments weren't as high as they are now. And I don't think there were as many uninsured," said Wachovia analyst Michael Matson.

"Given that the nature of this recession is different in that it's consumer-led rather than business-led, and given that insurance is disappearing, I'm concerned (orthopedic device makers) could have more economic exposure than people realize," he added

Without insurance, a new knee can be expensive. The average cost of a total knee replacement, excluding doctors' fees, was $31,000 in 2003, the latest year for which data are available, according to the U.S. Agency for Healthcare Research and Quality.

Dr. Mary O'Connor, an orthopedic surgeon at Mayo Clinic in Jacksonville, Florida, said her patients are more aware of out-of-pocket expenses and try to time elective procedures to minimize costs.

"If they're not miserable and they can delay surgery for three or six months, then they would do that," she said.