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Monday, December 12, 2016

Election Disrupts Healthcare Markets – A Time for Revisiting Existing Strategies and for Robust Scenario Planning

On the day following Donald Trump’s surprise election as President of the United States, HCA - the nation’s largest healthcare operator, lost $2.9 billion in market capitalization. Indeed, this surprising election result, and its implications for the future of the health care delivery model, has turned the financial markets view of the healthcare industry upside down. Given the level of uncertainty, companies across the healthcare spectrum are, or should be revisiting their strategies and engaging in thoughtful scenario planning exercises.

An anticipated Hillary Clinton election, particularly if bolstered by a Democratic takeover of the Senate, and perhaps the House of Representatives, seemed to have the industry on course toward a single-payer healthcare financing system. Universal coverage for all Americans (cost be damned?) was in the Democrats’ sights. Business plans for companies engaged in healthcare were geared for such a future.

This election launched an unexpected 180o turn in the direction of the industry. “Repeal and Replace”, long touted by the Republicans, now seems likely. But, what does that mean for providers, payers, drug and device manufacturers?

Wall Street despises uncertainty. In the case of this sudden change of direction of an industry, the Street responded with force. Stocks of health care providers were hammered: In a single day, Tenet shares fell 25.0%; Community Health Systems, 21.5%; Lifepoint Health, 13.5%; and HCA, 10.8%.

Shares of medical device companies experienced more modest declines, although Intuitive Surgical’s shares dropped 4.9% and Stryker, 3.8%. Drug manufacturers and distributors, conversely, initially saw share price gains: Mallinckrodt rose 10.4%, McKesson, 8.6%, and Merck, 6.1%.

Since that initial, impulse reaction, a slightly different picture has emerged: While the market capitalization of providers remains depressed from pre-election levels, drug manufacturers and medical device companies’ shares have taken a hit. Conversely, insurance companies are fared quite well, as the market interprets the implication of Trump’s proposed nomination of Dr. Tom Price as Secretary of Health & Human Services.

Clearly, the market has expressed its collective opinion that the election foretells a significant shift in the direction of the industry. Yet, tremendous uncertainty remains, both about the degree and the timing of any efforts to modify the Affordable Care Act (“Obamacare”). This uncertainty means that, while business plans and strategies developed pre-election must be re-visited, the path forward is cloudy. Will value-based care initiatives be retained? Will improvements in uninsured rates be sustained? Will the ‘cost curve’ be brought under control? Will the individual mandate stay in place? Will these changes take place in a methodical manner or, a chaotic one?

These questions and dozens more will profoundly affect strategies of every company in the industry. With so much uncertainty, do leaders simply sit back and wait? Or, do they initiate robust scenario planning effects, in preparation for whatever may transpire?

Tuesday, November 15, 2016

How well did ACA meet its objectives? Lessons for any revision/replacement

On March 23, 2010, President Barack Obama signed into law the most sweeping overhaul of the health care system since Lyndon Johnson established the Medicare and Medicaid programs via the Social Security Amendments of 1965. Obama did so without a single Republican vote and against the wishes of a majority of US voters.
Last Tuesday, voters exacted their revenge by surprisingly electing Donald Trump as Obama’s successor, and putting the Affordable Care Act (ACA or, “Obamacare”) on life support.
Since the election, pundits have been scrambling to determine the fate of the health care system. Financial markets have punished medical care providers (HCA, Tenet, Community Health Systems) and device manufacturers, while rallying behind health insurers and drug manufacturers, reflecting the market’s view of winners and losers from an anticipated ACA overhaul.
Before attempting to guess how far and how fast ACA will be overhauled, it’s important to re-visit how well, or poorly, the ACA met its original expectations.
Contemporaneous writings at the time of ACA passage trumpeted three primary goals for the legislation:
·      Reduce the number of uninsured Americans
·      Bend the cost curve of national health care expenditures
·      Render health care more affordable to average Americans
For the past several months, I have conducted extensive research of industry literature, government-published data and research analyses. Based on this review, I conclude that ACA met only 1 of these goals – to reduce the number of uninsured Americans – and failed on the other two.  This conclusion may help inform how any ACA revision or replacement should occur.
Reduce the number of uninsured Americans – success (albeit nuanced)
ACA is touted as having added as many as 20 million Americans to the health insurance rolls. On its face, this is an outstanding accomplishment, and argues for ensuring that we don’t go backwards by making dramatic changes to the system.  One should dig deeper, however, to understand the characteristics of the newly insured, and the remaining uninsured. Consider:
  • A majority of the reduction in uninsured rates resulted from Medicaid Expansion in those states that opted for that provision of the Act. Most of the (underwhelming) enrollment via the Exchanges was offset by the 8 million that lost employer-sponsored coverage since 2010.
  • The greatest improvement in insurance coverage was observed among the poor (at or near the federal poverty level) and minorities. Outstanding! Conversely, the largest segments of remaining uninsured are working class families and the young. ACA seems to have pushed healthcare even further from reach for these segments of the population.
Bend the cost curve of national health care expenditures - failure
Throughout the recent Presidential campaign, Democrats touted ACA’s success in lowering the rate of health care inflation. As recently as today, in his press conference before departing on his final foreign trip as President, Obama repeated this success, citing it as a reason for keeping ACA intact.
Ah don’t let facts get in the way of a good political argument!
The facts are that the slowdown in health care inflation began in 2008, long before ACA was enacted. Further, this inflation seems to have been resurrected in 2015-2016. So, if not ACA, what might explain the 6-year long slowdown and subsequent uptick?
An interesting analysis by the Kaiser Family Foundation and Altrum Institute provides a clue: Kaiser and Altrum researchers analyzed annual health expenditures from 1965 onward, attempting to discover causal factors for the annual rate of change in health care spending. Their finding was both surprising and enlightening: Despite all of our efforts to control health spending, 85% of the year-over-year change in spending could be explained by changes in GDP and in general inflation. Further, the impact of these factors took up to 5 years to fully exert their impact on health spending. In other words, the 2008 Recession had the effect of dampening health care spending through 2013!
Using the formula devised by Kaiser/Altarum, I re-projected health care spending from 2010-2015. Curiously, the Kaiser-Altarum model projected lower spending during each of these years than actually occurred. If true, ACA may have bent the curve upward, rather than downward!
Render health care more affordable to average Americans - failure
Recent reports suggest that 2017 premiums via the Exchanges are up 25% over 2016. And, while subsidies protect many from bearing the full brunt of this increase, it remains a significant problem for the middle class and working Americans.
An analysis by Kaiser and the Health Research and Educational Trust (HRET) paints a grimmer picture. Since 2010 when ACA was enacted:
  • Inflation is up 9%
  • Worker earnings are up 10%
  • Healthcare premiums, single coverage, are up 24%
  • Deductibles, single coverage, are up 67%
According to data from the Bureau of Labor Statistics, healthcare spending increased from 6.6% of household income in 2010 to 8% in 2014. Mean household spending on healthcare has increased by 8% per year since ACA was enacted.
To the average American, health care is more costly and unaffordable today than in 2010.
Where do we go from here?
Certainly, there are elements of ACA that should be retained through any revision or replacement. Among them: reductions in the rate of uninsured, the prohibition of deniability for pre-existing conditions, the inclusion of children up to age 26 on family coverage. Other elements should be re-considered: inappropriately low medical-loss ratios, rich mandatory benefits (side note – why do I have to pay for the mandatory pediatric dental coverage required by ACA?), limits on premium variations (i.e. premiums charged to older adults cannot exceed 3x those for younger adults).
Further, recognizing the impact on Medicaid Expansion on lowering uninsured rates among the poor, it would be wise to seek a solution that extends this impact. A GOP plan to replace Expansion with block grants to the states could be a positive move in this direction.

So, there are some good things about the Affordable Care Act and a host of not-so-good things. Let's hope we can do far better, now that we have been given a "mulligan".

Washington, it’s your move…

Implications of an Election

When you fail, it’s been suggested that you want to fail fast. Mission accomplished!

During my kick-off presentation last Tuesday at the Medical Device Supply Chain Council Fall Meeting, I concluded my remarks with a suggestion that we were moving rapidly toward a single payor health care system.  I felt that Hillary Clinton’s inevitable election as President would continue the momentum toward single payer – a system heavily favored by Barack Obama, Harry Reid and Nancy Pelosi.

Donald Trump’s surprise victory, reinforced by Paul Ryan’s likely retention as Speaker of the House and Reince Priebus’s selection as Trump’s Chief of Staff, has stopped this single-payor momentum dead in its tracks; signals an end to ObamaCare, in whole or in part; and, suggests a more consumer-friendly and market-oriented health insurance system is in our future. A complete reversal of fortune – and one that is already shaking up companies across the industry.

From the time it became clear that Trump, and not Clinton, would win the Presidency, investors have reacted in interesting ways with respect to health care equities. To better understand this, I analyzed the stock performance of group of 43 health care companies, representing providers, insurers, device and drug manufacturers, pharmacy retailers and distributors. My analysis covered the period from Election Day though week’s end.

Its apparent that the investor community believes that this change in fortune is good for health plans and, interestingly, distributors, and bad for medical care providers and device manufacturers. Consider:

Winners (change in share price 11/8 – 11/11)

            McKesson                                   9.6%
Cardinal Health                           9.2
Pfizer                                           8.6
Humana                                       7.9
Bristol-Myers Squibb                  6.0
Aetna                                           5.8
Cigna                                           3.8

            Tenet                                        (28.2)%
            Community Health Systems    (18.0)
            Lifepoint                                  (13.9)
HCA                                         (12.6)
Intuitive Surgical                        (9.2)
Stryker                                        (8.7)
Zimmer Biomet                          (3.7)
Boston Scientific                        (3.4)
Medtronic                                   (2.7)

Personally, I believe that the precipitous stock price drops observed for medical care providers may be somewhat an overreaction. From my conversations with industry participants, it appears to be driven by expectations that, by gutting ObamaCare, rates of uninsured Americans would increase thus, causing a drop in utilization for medical care providers.

Is this a realistic long-term view? Or, is it an over-reaction to a surprising election result?

In my view, the expectation that millions of people will lose their newly-gained insurance coverage is being over-played in the financial markets for several reasons:
  •  First, the primary driver of the 15-20 million newly insured under the Affordable Care Act (ACA) was Medicaid Expansion in 30+ states, not the ACA's Exchanges.  Although Republicans have fought this Expansion, they have indicated a desire to replace it with Block Grants to the States. This will provide greater flexibility to devise different programs designed to meet the same end.
  • Second, some 8 million Americans lost employer-sponsored insurance since ACA was enacted, primarily due to the excessive costs of mandated benefits under the program. Expect any ACA  revision or replacement to enhance the attractiveness of employer-sponsored insurance – more flexible benefit design, fewer mandated benefits, changes in permitted medical loss ratios, etc.
  • Third, the greatest incidence of uninsured today occurs among the young and working class households. For many in both groups, the cost of obtaining insurance under ACA is prohibitively expensive. Straightforward changes, particularly in age-rating restrictions, benefit mandates and interstate portability, will lower uninsured rates among these populations. 

For these reasons, the hit taken by medical care providers in the financial markets since the election seems to be an over-reaction.

Similarly, I find the stock price decline experienced by medical device manufacturers to be mis-directed. In addition to the preceding concepts, I also expect that these manufacturers will benefit from a more innovation-friendly FDA. Any acceleration in the approval process for new technologies can only improve device manufacturers long-term prospects.

Time will tell if my crystal ball is any better this week than last.

Next: How well did ACA meet its objectives? Lessons for any revision/replacement