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In: Opinions & Features

6.22.17 | Forbes.com

By Steve Brozak

To read the entire article on Forbes.com, please click here.

As the Republican Senate majority unveiled its draft healthcare bill Thursday, there was a rally in healthcare stocks in anticipation of reduced government regulation. The Senate plan calls for a vote on the bill before the beginning of the July Fourth recess. Any belief in such a schedule is unrealistically optimistic.

A Long, Hot Healthcare Summer

The Senate bill was developed secretly by 13 senators, reportedly with input from large pharmaceutical company lobbyists.  The bill is not expected to be scored by the Congressional Budget Office until early next week, and the full text of the bill should also follow sometime next week.  That leaves little time for review, comment and possible changes before July 3.  With rumored disagreement on sections of the bill even among Republican Senators, a vote on the bill by end of next week is virtually impossible. After July 4, the Senate will reconvene on July 10 for 14 working days before a month-long recess during August. Senators will then return to their states and Representatives to their districts, where they surely will hear from constituents. It may be a long, hot summer for healthcare reform.

As a healthcare analyst, I will not take a partisan position on the proposed legislation. My concern is the effect uncertainty will have on the now bullish biotech sector of the financial markets.

Wall Street detests uncertainty, and even though it seems like the Street hasn’t been paying too much attention to Congress, it knows that the healthcare bill represents an uncertain change from the status quo. While the chances of the Senate version of the health care bill passing in the form it was revealed Thursday are slim, passage in any form will force everyone to actually look at what our Congress has been up to. And the markets may or may not respond favorably.

Up until now, investment bankers have been busy spending nights calling on clients to sell deals as markets continue to rally, especially in the biotechnology sector. If they’re really smart, they would be telling clients to raise money and make deals before Congress causes the market to stumble. That situation could change overnight with the introduction and analysis of the current draft as the final bill is hammered out.

Most Congressional bills are presented, voted on and implemented after long deliberation and modification to accommodate the needs of the affected people and businesses. During the deliberative time, businesses can assess the potential impact of the bill when it is implemented by preparing to adjust their operations. If they see the bill’s impact as detrimental to their business, they can hopefully cause some changes to it.  Thursday’s version of the Senate healthcare bill was written in secret and unveiled a week before the proposed vote.

Some commentators report that the bill will eliminate a huge chunk of government spending with hospitals, insurance, pharmaceutical and biotechnology companies. Others say there will be no reduction in government spending, but slower growth. When all is said and done, the impact is uncertain and when the environment is uncertain, businesses take protective action.

Just as nature abhors a vacuum, business abhors uncertainty. Changing healthcare insurance subsidies and evaluating Medicaid allocation formulas must have already caused a lot of late night work in insurance actuarial offices. Even a company like Aetna (AET) that has completely withdrawn from the Healthcare Insurance Marketplace will need to build a buffer on premiums to compensate for uncertainty in the insurance market.

Insurance rates for all health insurance subscribers are likely to rise if Medicaid patients lose coverage. The Hospital Corporation of America, the formal name for which is HCA Healthcare (HCA), derives 3.8% of its $41.49 billion in revenue from Medicaid. But the loss from even a portion of Medicaid-funded revenue could be greater than 3.8% because not only do hospitals stand to lose revenue, they also can incur greater costs.

When patients don’t have insurance coverage, either from Medicaid or private insurance, their continuing and preventive medical care is severely reduced. The consequence can be greater emergency room usage for which the hospital receives no revenue from those who can’t afford to pay. As a result the loss in revenue must be absorbed by the remaining patients.

Biotechnology and pharmaceutical companies will also be included in the range of uncertainty. If millions of people no longer have health insurance, they will no longer be able to afford expensive maintenance drugs like Lyrica from Pfizer, Inc. (PFE) or Enbrel from Amgen, Inc. (AMGN).  Lyrica received 10.4% of its total product revenue from Medicaid in 2015, equaling $503 million in revenue and Enbrel received $437 million equaling 8.2% of total revenue in the same time-frame.  Because of the current environment regarding drug pricing, these companies won’t be able to raise prices on these two or any other high-priced product, which means potential loss of revenue to these companies that is likely to impact their bottom line.

Investor confidence in the healthcare investment market is likely to reflect the uncertainty about adjustments businesses will need to make to accommodate the law when it is implemented. Healthcare stocks, which have been pretty reliable and have offered solid growth could flounder, possibly leading to a negative impact on the entire market.

If somehow the bill were to pass, the roll-out of the new legislation would be staggered so that the true initial impact of this bill on individuals and healthcare sector companies won’t be felt until January 2019, which is conveniently after the 2018 Congressional elections. Other major aspects won’t be felt until 2021, after the next Presidential elections.

As Newton observed, for every action in nature there is an equal and opposite reaction. So too with laws that are hastily written and enacted. Such secrecy and speed causes uncertainty on multiple levels, in this case on the delivery of healthcare, on healthcare-related businesses and on the capital markets that provide the financial foundation for the entire healthcare system. Such laws will undoubtedly cause uncertainty, confusion and could have negative and unintended ramifications.