Tuesday, November 15, 2016

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

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