Healthcare Industries Are About To Experience An Entire Transformation

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by: Michael Chandler

Summary

Healthcare and all its many sectors including insurance are about to see a massive campaign to attack the exorbitant cost of healthcare in this country.

Today, we will look at the Administration's American Patients First initiative and how it will affect the healthcare industry.

Pharmaceuticals here in the United States are 3 to 4 times the cost of the same identical drugs throughout the world.

It's interesting to point out that last year the FDA approved 1000 new generic drugs.

The wind will certainly be in the face of these industries for several years to come.

Healthcare and all its many sectors including insurance are about to see a massive campaign to attack the exorbitant cost of healthcare in this country. How appropriate, seeing we are getting early indications from the CBO that Obama Care premiums will increase another 15% on average throughout the country. CNN reports in a few states we will see premiums increase 37%. Furthermore, the New York Times just reported on the financial stability of Medicare. Here's what they had to say: The Medicare trust fund will be depleted in 2026, the administration said. By contrast, the government said last year that the trust fund would be exhausted in 2029. Healthcare is on life support. This onslaught on the cost of healthcare is way overdue.

Today, we will look at the Administration's American Patients First initiative and how it will affect the healthcare industry. Before we drill down into this, let's take a few minutes to address some of the issues contributing to our high cost of healthcare. 1) One of the least obvious, but extremely powerful, is the lobbying efforts in Washington. $3.37 billion a year is spent on lobbying Congress. $713 million of that is from pharmaceuticals, insurance, hospitals, providers, and HMOs. Pharmaceuticals represent the largest lobby in DC. In 2017, pharmaceuticals alone, spent $279 million to lobby our legislators. 2) Pharmaceuticals here in the United States are 3 to 4 times the cost of the same identical drugs throughout the world. Most of the developed world has some form of a single-payer system much like Medicare and have the power to negotiate the price of most pharmaceuticals. As a result, the bulk of the cost of research and development is placed squarely on the backs of the US citizens. Time and time again the pharmaceutical lobby has blocked legislative efforts to force them to negotiate the price with Medicare. The industries argument is that if prices were negotiated through Medicare, it would have a tremendous impact on research and development to the extent many new innovative drugs and cures would not be developed. One of the four challenges, outlined in the American Patients First, is foreign governments free-riding off American investment and innovation. Sharing the cost of research and development among all beneficiaries throughout the world would reduce our cost for pharmaceuticals significantly. I wonder what the impact would be if they opened the world to free trade and allow US citizens the ability to purchase drugs abroad? It might force Pharmaceuticals to spread the R&D cost throughout the world. 3) Part of the new American Patients First initiative is to make the pricing of pharmaceuticals transparent. Apparently, there has been agreements between pharmaceuticals and pharmacies benefit managers under Part D Medicare plans to keep pharmacies from showing patients cheaper alternatives outside of their insurance plans. These new proposals will require pharmacies to disclose lower priced alternatives. Secondly, HHS may require Part D plan sponsors to provide additional information about drug price increases and lower-cost alternatives in the Explanation of Benefits they currently provide their members. 4) Pharmaceuticals have been gaming the patent process by re-categorizing their drug for other uses. By doing this, it allows them to extend their patents, keeping the drug from having a generic equivalent. It's interesting to point out that last year the FDA approved 1000 new generic drugs. Part of the new initiatives will be to shut the pharmaceutical's loophole and promote generic drug approval. 5) Pharmacy benefit plans as well as other benefit consultants are partially compensated by rebates or discounts based as a percentage of the price of the specific pharmaceutical. Structured as such, they are further incentivized by higher prices. HHS is looking into forcing PBMs to act as a fiduciary. By changing this practice, these discounts and rebates could be passed on to the patients. 6) The price discrepancies in meds between inpatient (Medicare Part A) and outpatient (Medicare Part B) is substantial. The cost of pharmaceuticals delivered in the hospital are anywhere from 10 to 20 times the cost at your local pharmacy. HHS is looking into these pricing practices.

The Administration's American Patients First initiative is basically targeting the pharmaceutical industry and its delivery processes. It has 4 key strategies, all designed to lower the cost of pharmaceuticals. Its objectives are to improve competition, better negotiation, incentives for lower list prices, and finally lowering out-of-pocket cost. Many of these initiatives can be enacted by HHS, but some will need legislative approval. Providers and insurance company practices will be scrutinized also. Here is an example that happens every day, in every corner of our country. Transparency and full disclosure is coming sooner than later. On May 30, CNBC published an article on why big health insurers don't care about your big healthcare bills. This article is about Aetna (NYSE:AET) and the patient from New York that had to have a hip replacement. His surgery went great, just an overnight stay and 12 rehab sessions. What Aetna didn't know, this gentleman was an actuary for the insurance industry and made a career of helping insurance companies set their premium rates. The surgeon as well as the hospital was in Aetna's network. Upon review of the itemized bill, this patient found that the cost for his surgery exceeded $70,000 and his 10% co-pay was around $7,000. This seemed a little excessive and prompted this patient to research the cost of this procedure throughout his region. He utilized healthcarebluebook.com, a website designed to give you the cost of various procedures. He was stunned to find the cost for this procedure elsewhere was drastically below the cost he was charged. Further research revealed Medicare paid a little over $20,000 for the exact same procedure at the same hospital. Please read the link to his story above, it is well worth your time. American Patients First initiative, the administrations blueprint to lower drug prices and reduce out-of-pocket cost, is Trump's first volley to drive down healthcare cost. Over the next few months, you will see many other initiatives to do the same. The net effects on the healthcare industry will be significant over the coming years. Pharmaceuticals, insurers, and providers will all face lower margins due to falling revenue from the impact of these initiatives. Total transparency is crucial to competition. The FDA is clearly pushing for the approval of generic drugs, by making them a priority. Furthermore, they are looking at ways to streamline the patent process. We have seen over the past few years Big Pharma making acquisitions in generics. My guess is this trend will continue. Furthermore, I suspect pharmaceuticals will be aggressively transforming their fixed cost in preparation of leaner times ahead. I suspect insurers, like Aetna will be taking a closer look at the prices they pay providers within their networks going forward. With total transparency, their clients will demand lower premiums and lower out-of-pocket cost. Lack of competition may have very well been one of the largest contributors to the downfall of the Affordable Care Act. It could be argued that since 2010, health insurers have had to reinvent their industry and will soon go through another transformation. Like the pharmaceuticals, they too will have pressure on their top line revenue and margins. Pharmacy Benefit Managers may very well experience the greatest revenue and margin pressures. The elimination of many of the bulk discounts they were accustomed to will be removed. In the future, I suspect these discounts will be passed on to the patients in form of lower drug cost. PBMs as well as pharmacies will be affected by mail order deliveries of pharmaceuticals directly to the patients. On the other hand, this could be a huge windfall for the likes of Amazon (NASDAQ:AMZN). Open competition and transparency will have a significant financial impact on providers such as hospitals, outpatient surgical centers, rehab centers, specialty physicians, and surgeons. Those companies that embrace this new transparent and competitive environment will survive the war on higher prices. They will also be looking for strategic purchases that carry huge synergies. Furthermore, they will embrace the new technologies necessary to streamline their business and cut fixed cost. On the other hand, there will be some medical industries that will cease to exist. Just look at what is happening to the dialysis industry. We now have an artificial kidney that I am told will be available in 2020. This will eliminate the need for a great deal of dialysis in this country. From a macro perspective, this entire effort of transforming all the components of the medical industry will require diligent CEOs and business managers that are willing to change their business models to accommodate this new era. The wind will certainly be in the face of these industries for several years to come.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investment advisory services offered through World Equity Group, Inc., member FINRA and SIPC, a Registered Investment Adviser. Dogwood Capital Management is not owned or controlled by World Equity Group, Inc.