How the Supreme Court's health care decision affects pharma

by Daniel R. Hoffman, Ph.D.

The Supreme Court's decision last week to let the Affordable Care Act (ACA) stand will not appreciably affect the escalation of costs or the other fundamental dynamics of health care. While the decision clearly provides fodder for politicians and other blowhards, its effect on most of health care's business sectors appears unlikely to alter the course of events.

On the provider side, hospitals and primary care physicians will both benefit because the number of uninsured patients will fall due to an increase of Medicaid rolls. Some specialists grumble because they fear that in an effort to curb the costs of covering 30 million more people, Medicare will cut specialty fees. That always remains a possibility, but any such cut may turn out similarly to the current pantomime in which Congress rescinds Medicare fee reductions every time they are due to take effect.

The manufacturing sectors such as pharma and devices will sustain both gains and losses, but nothing appears likely to alter industry fundamentals. Some ACA opponents claim that device manufacturers will take a hit from a dedicated excise tax, but Wells Fargo's Larry Biegelsen, an insightful equity analyst, forecasts a slightly favorable effect. Last week he told investors, "this outcome represents a small net positive for the medtech sector." The tax on devices, according to Biegelsen, "is already in 2013 [Wall] Street models, so estimates should not change." Those current forecasts, however, do not include the volume growth from covering 30 million new people. That means the ACA could represent an unplanned upside.  More generally, the gains for hospitals anticipated from the ACA could relieve some cost control pressures on that sector, thereby lessening their price constraint demands on device makers.

Pharma for its part negotiated neutral-to-positive consequences during the 2009-10 legislative battle. In return for withholding its demagogic "George and Martha" ads against the bill, pharma obtained a major concession that Medicare would not negotiate drug prices. Meanwhile, pharma's costs for filling the Medicare "doughnut hole" appear easily manageable. As far as additional taxes on the drug industry, even the Wall Street Journal stated that any "additional taxes on the sector are pocket change."

The underlying trends affecting manufacturers, providers and payers were unlikely to change no matter which way the Court decided. Providers and payers are driving those changes. In response to cost pressures, payers are spreading the risk and tying provider reimbursement to efficiency and quality measures. At the same time, payers and providers are consolidating, developing new payment methods, and digitalizing operations. Medical practices are consolidating into larger groups and hospitals are merging to obtain leverage against payers. At the same time, hospitals, practices and insurers are integrating with one another, either through equity or partnering arrangements.

In short, Obamacare will create neither a boon nor a major threat for pharma. On the other hand, the industry's entire customer base and its needs are changing enormously for entirely different reasons, while pharma's response remains flatfooted. Instead the drug companies continue flogging products that seem beside the point. Obamacare will actually support some of those payer-provider initiatives to encourage cost-effective treatment patterns and quality measures. For that reason, the companies most apt to benefit from the law are those offering technology and practice methods to advance efficient, consistent quality of care. 

What does pharma bring to that party?

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