Healthcare – Potential Election Impact

Cambiar Senior Analyst Charmaine Chan discusses potential impacts on the healthcare sector as we move into the election season.

Healthcare is a key issue for voters in 2020 due to its high costs and the associated ideological debates on accessibility (privilege vs right) and coverage (care at any cost vs quality-adjusted life years). The US industry has two key customers: 1) federal, state, and local governments with an approximate 50% volume share (Medicare, Medicaid/CHIP, VA/Tricare/Correctional Systems) and some ability to negotiate prices; and 2) the commercially-insured, who are collective price-takers due to relative fragmentation and insufficiently-aligned incentives. As a result, cost inflation has become a key part of industry growth where price discovery, cost/benefit trade-offs, and cost rationalization are not explicitly encouraged by most participants.

While the Trump administration recognizes that the current system is inefficient, the industry does fuel economic growth as the profit motive helps spur medical innovation. The fruits of such innovation are then distributed globally with minimal time lag, though costs are incurred over long periods and arguably subsidized by the US. Irked by this dynamic, Trump has proposed policy changes including rebate reform, hospital pricing transparency, drug importation from Canada, and an international pricing index, which have mostly fallen by the wayside due to lack of political will. On the Affordable Care Act, Trump defaults to the party preference for dismantlement. A potential Supreme Court ruling on the ACA in an election year is however likely to be avoided as the Fifth Circuit recently remanded the case challenging constitutionality back to the District CourtII.

Republicans recognize the need for increased party mind-share in the healthcare debate. To this end, Senator Grassley has proposed a bill focused on capping future price increases, limiting out-of-pocket costs, and re-engineering catastrophic coverage so that pharmaceutical companies and managed care organizations might bear more costs versus the government than at present. It ought to be noted that these points are echoed by Pelosi’s own bill, though partisan politics have prevented ideological alignment on slowing price growth and reducing consumer cost outlays from being legislated into law. We expect attempts but likely no concrete legislative action on healthcare in 2020.

From an investment standpoint, Trump’s perceived chances of winning likely represent status quo for the industry, with predictable streams of headline risks (e.g. mostly to Pharma/Biotech), but no material changes to revenue and profit structures in the short term. Should he be re-elected, Trump’s stance might harden and more bipartisan support could emerge to push through legislative changes in 2021. For 2020, we believe diversified exposure is critical within the sector, with particular interest in Managed Care and Pharma secondarily as multiples in these sectors are most likely to revert upward to the mean.

Among the Democratic challengers, all except Warren and Sanders are campaigning on some version of strengthening the ACA and offering a public option/Medicare buy-in for those aged 50 and aboveIII. The public option could potentially present the best scenario for the sector, as it could lead to higher volumes and minimally-affected price growth. We believe utilization-sensitive companies such as those within Facilities would benefit most in this scenario, as would Managed Care. Of note, the performance of the healthcare sector continues to exhibit strong negative correlation primarily with Warren’s perceived chances only. This is despite Warren having wavered on her commitment to Medicare For All, in contrast to Sanders’ consistent avowal to dismantle the current system to achieve universal coverage and accessibility (see charts).

 

 

Charmaine Chan is a Senior Analyst at Cambiar Investors.  Prior to joining Cambiar in 2016, Ms. Chan worked at Arrowpoint…
Should either Warren or Sanders win, we believe volumes will grow with a greater number of people insured and higher utilization, though prices may decelerate or even shrink due to tougher government negotiations. We believe volume growth will be insufficient to compensate for price declines, especially for labor-intensive businesses, hence we would selectively maintain exposure in other subsectors (e.g. Life Science/Tools, Animal Health) that are not directly impacted from this volume vs price dynamic.

 

 

Disclosures

ICenter for Medicare & Medicaid Services

IIwww.ca5.uscourts.gov/opinions/pub/19/19-10011-CV0.pdf

IIIhttps://www.kff.org/slideshow/where-do-the-democratic-candidates-stand-on-health-reform/

 

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