4.1.17 | Forbes.com
By Steve Brozak & John Nolan
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This is not a commentary that will weigh in on the potentially renewed efforts by Republicans to repeal and replace the Affordable Care Act (ACA). Such action would be premature given that we only have Speaker Ryan’s recent inducement to revisit the issue as the blame game for the failure of the American Health Care Act (AHCA)makes the rounds in Washington. Between interviews, Trump tweets and efforts by Senate Republicans to table the entire project until after (perhaps) tax reform is addressed, it remains to be seen whether Speaker Ryan’s efforts will gain traction. Nevertheless, the House’s first pass with AHCA could be used as a lesson of what not to do in the next go-around, whenever that may occur. Republicans learned that they must tread carefully in their plans to replace the ACA as the consequences of their actions will result in significant disruption across the healthcare industry.
Beyond the headline figures reported by the Congressional Budget Office’s analysis of the AHCA, which suggested that up to 24 million fewer Americans risked healthcare coverage relative to the ACA, certain sectors of the financial markets were disrupted as investor concern for the future earnings potential of hospital corporations like Tenet Healthcare THC -0.16%, and insurance providers like Molina Healthcare generated an industry-wide sell off. (Tenet’s share price declined by over 12% and Molina’s declined by over 9% between when the AHCA was announced on March 6 and when it was withdrawn on the 24th).
What was missing from the conversation, however, was an assessment of how the AHCA could also adversely affect revenue generation within the biotechnology and pharmaceutical industries. While the legislation did not specifically address drug manufacturers–Republicans had hoped to deal with this issue of drug pricing in their third tranche of healthcare reform–many of the largest biopharmaceutical firms would have been impacted directly through changes within the Medicaid system and the projected loss of up to 15 million beneficiaries by 2026.
As noted by the Centers for Medicare and Medicaid Services (CMS), although pharmacy coverage is an optional benefit under federal Medicaid law, all states currently provide coverage for outpatient prescription drugs to eligible individuals and most other enrollees within their state Medicaid programs. In 2015, CMS reported that Medicaid spent approximately $57 billion on prescription drugs for its over 73 million beneficiaries, with the majority (65%) of spending directed toward 155 drug products. While these sales figures do not include rebates for net spending, we do know from 2014 data that Medicaid spent approximately $42 billion on prescription drugs and received $20 billion in rebates from manufactures, for a net drug spend totaling $22 billion (52% of wholesale).
Had the AHCA become law and 14 million fewer individuals enrolled in Medicaid relative to Obamacare, several biotechnology and pharmaceutical companies could have seen their revenue forecasts for the next several years cut by billions of dollars. Those most impacted by the legislation would have been firms like Gilead Sciences GILD -0.46%, AbbVie ABBV -0.77% and Johnson & Johnson JNJ -0.15%, whose drugs like Harvoni, Humira and Invega currently rank in the top ten of the Medicaid Drug Spending list. (In 2015, for example, Medicaid spent over $2 billion for Harvoni, $805 million for Humira and $726 million for Invega).
In our assessment, the little consideration given to the broader impact of the legislation on the biopharmaceutical space–outside perhaps the analysts who directly cover these industries–is telling. Healthcare reform, as President Trump recently acknowledged, “is complicated” and has many interconnectivities that must be analyzed and assessed in parallel before proceeding forward. Simply put, any major reform legislation cannot be rushed without due consideration of its broader impact.
Regardless of political orientation, we think that most would agree the AHCA was a rushed piece of legislation. While Republicans were successful in drafting repeal bills several times during the Obama administration, less effort seemed directed to the “replace” side of the equation. The ACA as created with significant input from major stakeholders across all domains of healthcare. The AHCA, by contrast, was not. Drafts of the AHCA were hidden from even fellow Republicans until the 11th hour and then pushed through committee in two days.
As noted, it currently remains unclear as to whether a new proposal on healthcare from Speaker Ryan will gain traction. Senate Majority Leader Mitch McConnell on Wednesday suggested that the Senate had moved on to its next challenges of voting to approve Supreme Court nominee Neil Gorsuch and drafting tax reform legislation. If, however, House Republicans are able to cobble together new legislation, they would do well to avoid the public relations disaster that was the American Health Care Act (AHCA) and perhaps spend a little more time working through the second- and third-order effects of their proposals.
This post was coauthored with John Nolan, MPH, co-portfolio manager and analyst at WBB Asset Management, a boutique investment firm dedicated to life sciences investing.
