Healthcare reform in the headlines
We have seen healthcare reform in the headlines a great deal over the past few weeks due to President Trump's executive order around price transparency, comments around another executive order regarding drug prices, legislation and ideas making their way through congress, and the first set of Democratic debates. While the noise has certainly picked up, we do not expect recent developments to have a large adverse affect on healthcare fundamentals. Investors should prepare for further noise and understand just what is at stake for each proposal.
Trump's executive order
On 24 June, President Trump issued an executive order directing HHS to create regulations within 60 days requiring hospitals to increase price transparency by posting standard charge information. The information hospitals will need to reveal is negotiated rates and common services and items. Both providers and insurers are voicing their opposition to HSS during the development process and could very well challenge the regulations in court, possibly pushing implementation past the 2020 election cycle.
President Trump also created headlines on 5 July when he stated his administration was working on an additional executive order around drug prices with a favored-nation clause, where the US would pay the lowest nation's price. The details on the potential executive order are still limited for now as under current legislation, there is no mechanism to mandate the price the Federal government pays for prescription or injectable drugs. We believe the statement is in reference to doctor administered drugs (Part B) because the US government is not a large purchaser of prescription drugs due to private insurance companies running the Medicare Part D program. See Medicare reform for beginners for the breakdown between Part B and Part D.
Reform in Congress
The Senate Finance Committee is currently discussing possible legislation that would limit drug price increases in the Medicare Part D program. While the details are still being negotiated, the reform would focus on limiting price increases that are rising faster than inflation. We expect more news around the Finance Committee's development in the next few days, which we will be closely watching for any incremental reform details.
Another healthcare reform package, the Lower healthcare costs act of 2019, from the Senate HELP Committee contains 54 proposals from 65 senators and is currently on the Senate floor. Its main focus lies in tackling surprise medical bills and increasing price transparency. However, it also contains proposals concentrated on prescription drugs. For example, one provision bans Pharmacy Benefit Managers (PBMs) from charging more for a drug than the PBM paid for it in Medicare Part D. Others provisions included (14 in fact) attempt to increase prescription drug competition through promotion of generic and biosimilar access.
There are many proposals in the package mentioned above, especially around prescription drugs, that are reiterations of ones we have heard before. We believe the impact, in aggregate, is benign for the industry.
Democratic debate focus
As we discussed in our recent report, ElectionWatch: A healthy debate, healthcare is proving to be a defining topic of the 2020 election cycle. The Medicare for All (MFA) bills were garnering significant attention earlier this year, which weighed on sector performance. The first Democratic debates held on 26 and 27 of June showed that there is less support for a single-payer system than initially believed. Only four of the twenty candidates on stage offered a full-throated support for the elimination of private health insurance. The majority of other candidates supported the idea of a public plan option that consumers could buy on an exchange.
There were multiple times drug companies were targeted by candidates and a few ideas were mentioned such as the US government being able to negotiate directly with drug manufacturers within Medicare Part D. However, the details on the legislation alluded to are still largely up for debate, making it difficult to estimate the potential effect a change would have.
Impact
The market impact of ongoing reform attempts will ultimately come down to the mix of solutions required to build a successful consensus. We believe it is highly unlikely that legislation eliminating private health insurance in favor of a single payer system will pass due to the hurdles it faces. But that doesn't mean that other healthcare reform measures will not pass. A bipartisan compromise on drug prices will require a careful balance, addressing the interests of consumers while managing the potential disruption to pharmaceutical firms' incentive to fund significant research and development dollars to produce new drugs.
There is momentum pushing drug price reform forwards from both sides of the aisle, which will certainly cause a significant amount of noise and potential volatility for the sector. Investors should be prepared for potential changes but understand the full impact of the adjustments before reacting.
Author:
Reid Gilligan, Equity Associate Analyst Americas, UBS Financial Services Inc. (UBS FS)
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