March 12, 2023
Last Thursday, the Biden administration released its proposed FY24 federal budget which is certain to spark political posturing by partisans on all sides and long-term speculation by political pundits and economists. At a high level, it includes…
- $6.6 trillion in spending vs. $6.27 in FY22.
- $5.5 trillion in tax increases over the next decade including a new 25% minimum tax on people and families with a net worth of more than $100 million, a new 15% minimum corporate tax on billion-dollar companies and a quadrupling of the stock-buyback tax rate from 1% to 4%. increased top rates for corporate (from 21% to 28%) and individual taxpayers (from 37% to 39.7%) plus an increase in the Medicare-tax unearned income tax rate for those making $400,000 or more (3.8% to 5%)., new taxes on international corporate profits and $30 billion from tax changes aimed at fossil fuel companies.
Its healthcare-industry specifics include…:
- Increased Health & Human Services’ budget by 11.5%
- Increased funding over 10 years for Medicaid home-and community-based services ($150 billion), pandemic preparedness ($20 billion), mental health programs ($20 billion) and global health including pandemic preparedness ($11 billion).
- Increased regulatory focus on workforce shortages, data protections and mental health access.
- Expanded authority for Medicare to negotiate directly for drugs saving Medicare $160 billion over 10 years and adding drug rebate requirements for commercial payers (in addition to Medicare) saving Medicare $40 billion over the decade.
- Requirements that Medicaid insurers to refund excess profits (estimated $20 billion/10-year savings).
- Closure of Medicare tax loopholes.
In total, healthcare spending represents 30% of the total outflow of federal funds in this budget compared to 29% in ’22 (Medicare 12%, Veteran’s Health 2% and Other Line Items 15%)—almost 50% more than Social Security and more than 100% above defense spending.
While details of the President’s proposed budget are pending, the administration asserts this budget will reduce the Federal Deficit by $3.3 trillion over the next decade and shore up Medicare Part A finance into the next decade.
My take:
Presidential budgets are required by law and routinely buried in the malaise of partisan politics. The same is likely true for this budget which comes as competitors for the White House line-up. It’s rich in populist platitudes to help the working poor, end waste and corruption and rein in corporate greed. And it singles out industries safe for criticism—”big oil, big pharma, and special interests.”
No doubt, every trade and professional association will weigh in offering views of its shortcomings and suggested changes. In media echo chambers, coverage will reinforce the partisan predispositions of their audiences. And professional politicians will pander to their followings using focus-group tested phrases to appear knowledgeable on fiscal issues while dodging queries that prove otherwise.
What sets this budget apart is its attack on wealth, capitalism, big business and profit. Healthcare is bullseye for these–whether deserved or not.
What concerns me about this budget is what’s not mentioned: hospitals took a financial beating in 2022: they’re not mentioned. Physicians, especially those in preventive, behavioral health and primary care, are burnt-out and frustrated by “all talk, no action” policies that advantage specialists over them. Nurses are tired of being “unsung heroes” and ready to be rewarded. And hourly workers in acute and long-term care settings are organizing against corporatization in their sectors that hikes exec comp and cuts staffing and hourly wages.
Regrettably, voters are pawns in healthcare Infowars. Beliefs are deep-seeded and often ill-informed. That disconnect will be on full display as this budget is discussed.
Paul
P.S. Daylight savings time: In 1918, the US adopted national Daylight Savings Time following the lead of Germany and the UK. But given mixed results and declining popularity, President Gerald Ford rescinded the law in 1974, while permitting states to adopt their own rule. Today, only Hawaii, most of Arizona, and US territories stay on standard time year-round while Colorado, Kentucky, and Mississippi passed bills in support of making it permanent in their state in 2022. Like healthcare policies, daylight savings time remains a state issue. The good news: the hour of sleep you lost last night takes only a week for most circadian clocks to adjust per sleep specialists! Wish that was the case in healthcare policy which to most voters are almost instantly out of sight, out of mind. Even a week of reflection would be good.
P.P.S.: As the week begins, the demise of Silicon Valley Bank will spark energetic debate about the stability of the U.S. banking system. Lending to early-stage biotech and HIT companies will be directly impacted but a systemic pull-back from healthcare lending is unlikely. SVB made bets arguably more risky than otherwise prudent. More to come.
The President’s Budget Cuts Wasteful Spending on Big Pharma, Big Oil, and Other Special Interests, Cracks Down on Systemic Fraud, and Makes Programs More Cost Effective March 9, 2023 /www.whitehouse.gov/briefing-room/statements-releases/2023/03/09/fact-sheet-the-presidents-budget-cuts-the-deficit-by-nearly-3-trillion-over-10-yearsHouse
Quotable from Last Week
Re: Medicare Advantage cuts in 2024: “We found in years that there’s pressure on the rate notice, we do much better. I feel that 2024 will be that way.”
Humana President and CEO Bruce Broussard at TD Cowen conference in Boston March 7,2023Humana is the second-largest Medicare Advantage carrier with 5.1 million members, or 18% of the market, while the leading insurer, UnitedHealthcare, has 7.1 million policyholders and a 29% market share
Re: Powell on economy, likelihood of rate hike: “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,”
Senate Banking Committee March 7, 2023
Re: Insulin prices: “The White House took a victory lap last week after the drug maker Eli Lilly announced that it was capping insulin at $35, claiming that the president helped force the change by using the bully pulpit.
In Biden’s Inflation Reduction Act, lawmakers agreed to cap insulin at $35 for Medicare recipients, but a proposal to limit it for all Americans was defeated by Senate Republicans.
A recent Axios-Ipsos poll found 84% of Americans strongly or somewhat support placing a $35-per-month limit on the out-of-pocket costs for insulin.”
Axios Sneak Peek March 8, 2023 www.axios.com
States: Marijuana: “On Tuesday, Oklahoma slowed the roll of marijuana legalization across the country, voting down full legalization 61.7% to 38.3% in a referendum. To date, 21 states have legalized recreational marijuana use, while 37 have approved some form of medical marijuana statute. But the product remains illegal at the federal level, which has led to contradictory regulations.”
Oklahoma State Question 820 Election Results: Marijuana Legalization March 7, 2023 www.nytimes.com/interactive/2023/
Support Year-Round Standard Time JAMA. March 8, 2023. doi:10.1001/jama.2023.0159
Re: Biden budget package: “The President’s proposal is not designed to pass. It is designed to bring all factions to the bargaining table to face the rapidly unfolding fiscal realities. However, that seems unlikely until the battle over raising the debt ceiling is somehow resolved.”
Kerry Weems Kerry Weems Commentary: Medicare and the Social Contract 4Sight Health March 9, 2023 www.4sighthealth.com/kerry-weems-commentary-medicare-and-the-social-contract
Access to abortion pills: “Walgreens Boots Alliance Inc. has found itself at the center of the fray after the pharmacy chain said it wouldn’t dispense the abortion pill in states where abortion is illegal and in several states where it is currently legal, including Alaska, Iowa, Kansas and Montana, given the “complexity and flux” of the laws in those places related to medication abortion as legal battles over access continue.
The move won praise from some Republican politicians but sparked backlash from several Democratic leaders. California said Wednesday it was dropping a multimillion-dollar contract with the company.
Republican state attorneys general last month sent Walgreens letters outlining their legal arguments against the Food and Drug Administration’s move to loosen restrictions on the abortion pill.”
Walgreens Abortion Pill Furor Highlights Complexity of Access in Post-Roe World WSJ March 8, 2023 www.wsj.com
Notable Deals announced Last Week
- VillageMD, a company majority owned by Walgreens, has acquired the 30-location primary care physician group Starling Physicians based in Rocky Hill, CT. The deal comes on the heels of VillageMD’s acquisition of Summit Health-CityMD for $8.9 billion.
- WeightWatchers’ stock soared Tuesday after the company said it is getting into the prescription drug weight loss business with the acquisition of Sequence. WW International, based in New York, will pay $106 million for Sequence, which served about 24,000 members across the U.S. as of February, with annual revenue of about $25 million.
Insurers
KFF: Plan profit margins per and post pandemic: Per the Kaiser Family Foundation analysis of gross profit margins per enrollee for 2021:
- Medicare Advantage: $1,730
- Medicaid Managed Care: $768
- Individual Commercial Market: $745
- Group Commercial Market: $689
They concluded “We find that, by the end of 2021, gross margins per enrollee had returned to pre-pandemic levels in the Medicare Advantage market, while gross margins in the individual and group markets were lower than pre-pandemic levels and Medicaid margins were higher than pre-pandemic levels. Medicare Advantage plans have far higher per person gross margins—more than double those seen in other markets in 2021.”
Health Insurer Financial Performance in 2021 KFF March 9, 2023 www.kff.org/medicare/issue-brief/health-insurer-financial-performance/
Leapfrog: Employer Satisfaction with Health Plans: Percentage of Employer Agreement their Health Plan has These Key Characteristics:
- Gives employees easy access to usable data: 59%
- Cares about quality of healthcare received: 57%
- Improving employee health is a priority: 56%
- Committed to reducing unnecessary health costs: 53%
- Gives employees quality information on providers: 40%
- Puts employer needs over hospital needs: 38%
- Shares quality and safety data: 26%
Leapfrog Group: 2022 Survey: Are Employers Satisfied that Health Plans Drive Quality, Safety, and Value?, January 2023 www.leapfrog.org
Healthcare Investing
Recap: Last week’s Healthcare Private Equity and Finance Conference in Chicago: The event, sponsored by PitchBook, focused on middle-market healthcare services. Takeaways:
- Cardiovascular is the buzziest specialty of 2023.
- RPM is becoming an increasingly important ancillary healthcare IT investment.
- Adolescent mental health is red-hot, with platform multiples reaching into themid-20s.
- Leverage is down 1.5 turns (to 5x EBITDA on average), whilevaluation multiples are down 2 to 3 turns on average. Bid-ask spreads are wide, and some categories have not settled on a new normal
for valuations due to a lack of deal flow. - Covenants are tightening but lender scrutiny is around proforma EBITDA adjustments.
- Staffing woes continue, especially for specialties reliant on low-wage labor.
- Firms will focus on acquisitions of small platforms that have not yet taken
institutional capital in 2023
Takeaways From the 2023 McGuireWoods Healthcare Private Equity and Finance Conference March 7, 2023 https://files.pitchbook.com
Silicon Valley Bank shutdown: Last week, Silicon Valley Bank, which served bio and tech sectors, was shut down after customers withdrew $42 billion from their accounts on Thursday. SVB’s shared plunged Thursday, losing 60% of their value, and were poised to take another dive Friday before trading was halted. The shares never reopened. Friday morning CNBC reported that the bank was in talks to sell itself, a move to shore up its capital, the FDIC announced the bank would close and its assets would transfer to the new entity. SVB says it banked 44% of 2022’s venture-backed tech and health care IPOs, and 55% in 2021.
Prescription Drugs
Drug pricing: 46 Brooklyn drug price research: The median starting price—meaning half were higher and half were lower—for a newly approved drug nearly tripled to $7,034 per patient monthly in 2022, from $2,624 in 2011, according to an analysis conducted for The Wall Street Journal by 46brooklyn Research, an Ohio-based nonprofit that analyzes drug price data. The 46brooklyn analysis focused on the list prices for 485 prescription drugs approved by the Food and Drug Administration since 2011 that had an active ingredient not previously approved by the FDA.
An analysis in the Journal of the American Medical Association last year finding that 47% of the new drugs approved in 2020 and 2021 had annual list prices of at least $150,000, versus only 9% of drugs approved from 2008 to 2013.
New Drugs for Cancer, Rare Disease Can Now Cost More Than $20,000 a Month WSJ March 9, 2023 www.wsj.com/articles/new-drugs-are-coming-to-market-at-sky-high-prices
Social Determinants
Study: food choice incentives: In this randomized clinical trial of 2744 participants, those receiving a 50% discount on eligible fruits and vegetables and/or default fruit and vegetable items in their shopping cart spent more (5%-13%) on fruits and vegetables compared with those who did not receive an intervention.
“… financial incentives for fruits and vegetables and default options, especially in combination, led to meaningful increases in online fruit and vegetable purchases among adults with low income.”
Effect of Financial Incentives and Default Options on Food Choices of Rummo et al Adults With Low Income in Online Retail Settings A Randomized Clinical Trial JAMA Netw Open. March 10, 2023;6(3):e232371. doi:10.1001/jamanetworkopen.2023.2371
