With AHCA in the Balance, Healthcare Sector Remains Conflicted

May 17, 2017

After much ado about healthcare reform, the Trump administration and Republican-majority House of Representatives voted through the American Health Care Act of 2017 (AHCA) in early May, despite the initial legislative defeat weeks prior. 

Polling in the week after the GOP’s legislative victory revealed widespread disapproval for the bill, demonstrating overall approval numbers ranging from 31 – 38%. Proving particularly unpalatable for public taste are provisions that health policy experts expect could lead to weaker protections for people with pre-existing conditions, as well as those that allow insurers to offer plans with inferior coverage.

As the bill moves to the Senate, its fate undetermined, investors face similar uncertainty as they attempt to read the tea leaves on what’s to come for the sector. 

While a dominant factor, healthcare legislation isn’t the only dynamic expected to influence the industry. Commissioner Gottlieb’s confirmation as FDA Head, ongoing policy turmoil and potential tax reform are all examples of how Trump’s influence may be felt across the sector.

Mizuho healthcare analysts break down what to expect for the coming months as the AHCA remains in the balance. 

AHCA in the Balance as Fundamentals Falter

According to Mizuho analysts, passage of the AHCA is expected to prove inimical for hospitals. 

“This is how healthcare for the uninsured dies...with a cheer from the GOP. The end of the 'Caid expansion in 2020 and a near certain rise in the uninsured came closer to reality just now as the House GOP pushed through an unscored bill with a winning vote of 217-213,” wrote Mizuho Director of Research Sheryl Skolnick.

With news of House passage, she wrote: “Hospitals should not be up, in our view. This is a potentially very damaging bill for them unless amended by the Senate and then passed by the House again. Nothing is for sure in this politically bizarre world, but we would avoid the hospitals - this is not good for them - for the most part unless there are compelling cash flows to offset some of the negative impact on Medicaid, cash flow and margins.”

While the outlook appears grim, it’s not all bad news. The only “good part” Skolnick continues, would be if “the health insurance industry fee gets repealed too, as do some of the DSH cuts. But that could be small comfort to the hospitals if the Senate doesn't seriously amend the Medicaid funding, subsidy funding and coverage expansion concerns in its version.”

Even without this major policy overhaul, hospital fundamentals appear to be less than vital, adding fuel to the fire of concern. 

Skolnick expressed this underlying concern for weak fundamentals on CNBC’s PowerLunch, saying: “there are still some issues out there that I think are prudent to pay attention to…volumes in Hospital-land have been coming down even with the ACA and that’s because of innovation and it could adversely affect Tenet and its peers.

If the growth rate slows or emergency room visits decline as they are for some of these companies, that could spell a problem for the part of the business where you’ve deployed the most capital – and that’s the in-patient hospital bed.”

With flawed fundamentals and problematic policy in the future, hospitals are not expected to rebound any time soon. 

FDA Pick, Tax Reform and Future Policy Impact Looms

Gottlieb’s FDA appointment, potential tax reform initiatives and Trump’s dedication to healthcare reform are additional forces that the industry may contend with in the years to come.

With recent confirmation as the FDA commissioner, Scott Gottlieb is expected to largely work in the industry’s favor. A study carried out by Mizuho biotech analyst Salim Syed showed that 72% of drug company executives favored Gottlieb over other potential nominees, citing his previous qualifications in the field and perceived ability to balance expedited drug trials with safety concerns. 

Syed also notes that while Gottlieb is perceived to be good for generics, he is not necessarily bad for branded drugs either.

For specialty pharmaceuticals analyst Irina Koffler, the issue of competition is a particularly prevalent pain point for the sector, with the FDA currently backloaded by over 4,000 generic drug applications. Expediting drug trials and the FDA approval process will help increase competition that will benefit pharmaceutical players.

“Before [the FDA] can make a dent in that backlog, the agency needs more funding, more staff and legislation to clear out a thicket of laws and legal decisions that slow down drug approvals,” Koffler said to Investor’s Business Daily.

“Generic submissions are sitting there languishing while there is not enough competition. There's some situations where you'll have a supply monopoly where one company is the only one manufacturing a certain generic drug and therefore charges a lot for it,” she added.

Tax reform is another lingering policy initiative put forth by Trump that stands to impact the sector. In addition to the effect of tax reform on Medicaid block grants, Skolnick views tax reform as promising for the sector and notes that UHS and HCA in particular stand to benefit from such legislation.

“Despite many unknowns, we believe tax reform could be a significant positive cash flow event for UHS given its limited international exposure, solid balance sheet and, more importantly, the service-oriented revenue generating companies not impacted by the potential of a border tax,” she wrote.

An Industry Infirmed?

With or without policy upheaval, the hospital sector is exhibiting pre-existing conditions. In addition to the passage of the AHCA by the House, underlying fundamentals and headwinds paint a more pessimistic picture for hospitals than recent stock rallies would suggest, according to Skolnick. 

On the pharmaceutical side, the new FDA head may expedite drug trials to the industry’s benefit, increasing competition and serving as a potential boon for both generic and branded drugs.

As Skolnick notes, politics and healthcare often make for strange bedfellows. Between Trump’s dedication to reformed healthcare legislation, uncertainty regarding tax reform and the impact of agency appointees, the outlook for the healthcare sector remains a conflicted one.

Simon Hylson-Smith

CEO, Paragon

Simon Hylson-Smith is a former financial industry editor and currently CEO of Paragon.

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