August 6, 2012: The Patient Protection and Affordability Care Act (PPACA), known as “Obamacare,” has been the most heavily debated and divisive federal legislation in a generation.
The controversy is due in large part to the law’s broad impact on the American populace and business community. And many critics say the PPACA also redefines the authoritative reach of the federal government. It’s no wonder that the recent Supreme Court decision regarding the law’s constitutionality received a level of media attention typically reserved for celebrity scandal.
At the crux of the controversy lies the individual mandate, a legal provision that’s been the subject of more public outcry than nearly any other in decades. Beginning in 2014, this provision requires all legal residents in the United States to have qualifying health care insurance coverage or pay a penalty tax.
The PPACA also expands state-run Medicaid programs by increasing the income requirement to 133 percent of the federal poverty level for individuals under 65. These two provisions are expected to provide health care coverage to more than 30 million uninsured individuals.
On June 28, Chief Justice John Roberts delivered the majority opinion in which the Supreme Court held the individual mandate constitutional under Congress’ right to tax. The expansion of Medicaid also was deemed constitutional; however, the court added that the federal government couldn’t penalize states for not adopting the program’s expansion as had been proposed.
The decision came after months of anticipation, during which uncertainty regarding the outcome led to investor wariness and greater declines in health care M&A activity relative to the overall market. Now that a decision has been reached, it’s a good time to reflect upon the impact reform is having on health care investors.
• Impact on managed care companies: The PPACA is a mixed bag for the managed care industry, but ultimately highly disruptive. While the number of individuals purchasing insurance surely will increase revenue, the health care insurance industry will, in turn, be subject to a number of onerous but ultimately manageable regulations. These include an industry tax, profitability caps and underwriting restrictions.
• Investment opportunity: Managed care companies have spent several years crafting strategies to address the changing environment, and acquisitions have proven to be a useful tool in their execution. WellPoint’s $4.9 billion purchase of AmeriGroup, for example, represents a significant play on the growth prospects of Medicaid managed care and is emblematic of industry-defining transactions likely under consideration.
Other managed care companies have acquired technology assets, services capabilities and clinics to more closely monitor and manage the health of their insured membership. Assets also are being acquired to ready companies for the individual insurance markets that will be created though state-run health insurance exchanges.
• Impact on hospitals and other providers of health care: Health care reform is considered a positive for many providers of health care services such as hospitals, physicians and clinics, though some exceptions exist. Expanded coverage is expected to drive increased consumption of health care services while reducing the amount of unpaid medical bills and charity care incurred from providing care to the uninsured.
In opposition to this revenue boon, the industry will be subject to Medicare and Medicaid reimbursement rate cuts and new payment models that incorporate risk-sharing and quality of care measures.
• Investment opportunity: In response to rate cuts and proposed bonuses for quality measures, many hospitals are purchasing physician clinics to drive patient volume and other assets to create vertically integrated models. This strategy allows companies to exert additional control over patient care, with the goal of improving quality and reducing costs.
Hospital technology service providers also have increased acquisitions of technologies that measure health outcome quality, manage payment administration and increase connectivity among facilities.
• Impact on pharmaceutical and medical device companies: The pharmaceutical industry is expected to benefit from reform through increased insurance coverage and drug utilization. This is despite $28 billion in new industry taxes in the next 10 years, Medicaid drug rebates and mandated drug discounts for some Medicare beneficiaries.
Similar to hospitals, higher utilization is expected to offset profitability pressures. Medical device manufacturers are likely to benefit less from coverage expansion than pharmaceutical companies and still will have to contend with reform provisions aimed at cost containment, including a 2.3 percent industry excise tax.
• Investment opportunity: Efforts to contain pharmaceuticals and device costs by insurance companies, hospitals and the government (reform-driven or otherwise) continue to drive acquisitions in both industries. Pharma and device companies are responding by acquiring innovative products that address new markets previously underserved.
Such products are expected to garner premium pricing, and protect margins and revenue growth while generic products penetrate many existing markets. Recent examples include Gilead’s $11 billion acquisition of Pharmasset, a leader in hepatitis C therapeutics.
Most companies are executing on their strategies assuming reform is here to stay; however, all eyes are on the presidential election in November. Should Mitt Romney become president and Republicans take control of Congress, the future of health care reform again may hang in the balance.
Source: John & Rusty Report via Word & Brown