As the week ended, the eyes of the healthcare industry were focused on the fate of the Affordable Care Act. A series of three legal challenges set the stage for the coming high-profile court battles:
Monday, the U.S. Department of Justice announced it agreed with an earlier court decision (Texas v. United States) that the ACA is unconstitutional because Congress eliminated the ACA’s individual insurance mandate penalty in its Tax Cuts and Jobs Act of 2017.
Wednesday, a federal judge in DC ruled against work requirements for some Medicaid recipients in Kentucky and Arkansas were invalid throwing uncertainty into similar plans in 7 other states.
Thursday, a federal judge in DC blocked rules that would have allowed small businesses and individuals to band together to create group health plans (association health plans/AHPs). The ruling said the administration’s effort to allow AHPs was a clear effort to avoid following the rules of the Affordable Care Act (ACA). Since the administration passed its Final Rule in 2018, 28 AHPs had gone into effect in 13 states. Their fate is now in limbo.
Quite a week for the Affordable Care Act and the industry. It’s reminiscent of the numerous court battles that have resulted from its passage in 2010 and the Supreme Court decision affirmation of its constitutionality in June, 2012. In tandem, the President promised Republicans would be the party of healthcare replacing the ACA with a plan now on the drawing board that will protect against denial of coverage for the 133 million with pre-existing conditions and also be cheaper.
Never a dull moment in healthcare!
Venture capital, private equity, investment banks and institutional investors are keen observers of healthcare: they see its dysfunction and complexity as opportunities to cash in on changing consumer behavior akin to Lyft’s initial public offering last Friday.
The San Francisco based ride-hailing service raised $2 billion in its initial public offering, topping out at $88.60/share from its opening price of $72/share. By the weekend, its market capitalization reached $22 billion placing it in the middle of the pack among the 20 well-established companies in the Dow Jones Transportation Index like Delta Airlines, UPS, FedEx and others.
Investors bet on momentum. They were impressed by the company’s growing revenues, riders and contribution margin. Not bad for a company only 8 years old. But sentiment has changed rather quickly as investors began to study what’s priced into the stock, namely a forecast that relies heavily on leveraging A.I. to turn a profit, as well as the inevitable impact of the soon to be Uber IPO.
On the surface, transportation and healthcare have many similarities: they’re high profile industries that are heavily scrutinized by regulators. They’re essential services. They are capital intense and technology dependent. They’re big. They’re competitive. And they face considerable court challenges and regulatory scrutiny. Consumers are directly spending more of their out-of-pocket funds in both. Competition is keen. Trusted brands matter. And investors are ready to invest in companies that create momentum around better mousetraps challenging sacred cows and outdated business models.
In my view, opportunities in U.S. healthcare center around four themes:
The near-term uncertainty about the ACA, a GOP replacement, Medicare for All, Expanded Medicare and others policy shifts mean changes in ‘20 and ‘21 are not likely to be dramatic. The federal budgeting process for FY20 and FY21 will include adjustments to key line item budgets (like Veterans Health and others) but mostly cuts in Medicare and Medicaid. Drug prices will moderate as patents are lost by branded drug makers and public pressure builds. Private insurers will continue to see growth and profitability in Medicare Advantage and managed Medicaid and hospitals, physicians and post-acute providers will consolidate to better coordinate care in risk-based contracts. No surprises. No major changes.
For investors, it’s good news: this means more opportunities. Stakeholders are looking for the next company to capitalize on changing consumer behavior all within the ever-changing regulatory landscape that is healthcare. And market conditions in the U.S. indicate it’s ripe for the healthcare version of Lyft, but substantial progress remains to be seen.
PS Lyft’s stock dropped in early trading Monday—that’s the roller-coaster publicly traded companies ride every day. But most public companies recognize stock volatility does not reflect a company’s underlying value nor the strength of its opportunity. In healthcare and transportation, successful companies play long-ball.
PS: Last week, the New York Attorney General filed suit against 6 drug companies including OxyContin-maker Purdue Pharma, and 4 drug distributors accusing complicity in a massive scheme to overstate the benefits of taking opioids, encouraging long-term opioid therapy, discouraging alternative treatments and downplaying risks from the highly marketed medications.
A study by the White House Council of Economic Advisors estimated the cost of the national opioid crisis to be $504 billion or 2.8% of GDP in 2015. According to new research by the Missouri Hospital Association, in the two-year period between 2015 and 2017, the actual number of opioid overdose deaths increased 15,000 or 46%. “Our research finds the economic cost of OUD and associated overdose deaths to be $685 billion in 2017, or 3.5% of GDP.“ The Economic Cost of the Opioid Crisis in the U.S. A State-by-State Comparison https://www.mhanet.com/mhaimages/Policy_Briefs/PolicyBrief_Economic_Cost_ofthe_Opioid_Crisis_inthe_U.S._0419.pdf
Pain medication abuse claims 116 lives per day in the U.S. It’s an issue in which every sector in healthcare bears some responsibility. It exposes a fundamental flaw in the U.S. system: the mis-use of opioids. Example: to reduce back pain, education and proper exercise, not opioid painkillers work best (The Lancet). But health plans pay for opioids and often make it difficult for patients to access evidence-based interventions such as physical therapy. And many patients are not-adherent to exercise treatments compounding the issue. (www.thelancet.com/series/low-back-pain).
The opioid crisis is a systemic black eye for the U.S. healthcare industry: it’s an opportunity for the industry to set aside sectarian blame and attack a menacing health problem that kills more of our sons and daughters every year than smoking or for the entire Vietnam War.
More drugs are coming into generic status, but there are drugs in the pipeline that are brand new and will cost millions, not "just" hundreds of thousands. They will be used for rare diseases, but for children’s diseases. I don’t think we’ll see an amelioration of the cost of drugs because of pipeline drugs.
Gus Geraci, MD